For many small, unquoted companies – it may be difficult to find a purchaser when a shareholder wishes to dispose of their shareholding. In this article, we look at company purchase of own shares.
The company may be owned by a limited number of individuals, often family members and there may be no wish for the shares to be sold to a third party.
It may also be difficult to find a purchaser willing to acquire the shares.
In these circumstances, a company purchase of own shares may provide the solution and the legislation provides a taxation concession to aid the transaction.
Without any special provisions, the payment for the shares will be treated as an income distribution and taxed as Income Tax on the vendor.
However subject to meeting a number of conditions, the disposal of the shares will be treated as a capital transaction and will be subject to the normally lower Capital Gains Tax rates of 10% or 20%.
The conditions for the company share buy back to qualify as a capital transaction include:
- The share buy back should be made for the purpose of benefiting the trade. HMRC view this as to include: when there is disagreement between the shareholders over the management of the company which is having an adverse effect on the trade; or removing an unwilling shareholder who wishes to end his association with the company.
- The seller must have owned the shares for 5 years.
- The seller’s interest in the company must be substantially reduced. The seller’s interest must not be more than 75% of their interest immediately before the purchase.
- The seller must not be connected to the company after the purchase takes place. They will be considered to be connected if they possess more than 30% of the issued ordinary share capital, loan capital or voting power or are entitled to receive more than 30% of the assets on a winding up.
An advance clearance application can be made to HMRC to confirm the taxation treatment of the company share buy back and to provide certainty to the vendor on his taxation liabilities.
If you need any advice or assistance with company purchase of own shares, do get in touch with your usual Lambert Chapman contact.
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.