Tax on share buy back

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Gannons assisted an employee of a digital media company in switching to a competitor. We helped sell his share in the company and negotiate his post-termination restrictions.

Our client had recently resigned as an employee of a digital media company, in order to take up a fantastic opportunity with a competitor. He wanted us to sell his company shares, and negotiate post-termination restrictions. This required us to review the relevant documentation, including the company’s articles of association, shareholders agreement and director service agreement.

Options for selling shares

We established that our client had several options for selling his shares. Each of these had different tax consequences. This was because, unusually, the articles of association and shareholders agreement did not did require a director or employee to sell their company shares when their directorship or employment ceased.

The main options we presented to our client and discussed with him were that: he could remain a company shareholder; sell his shares to a third party; sell his shares to an existing company shareholder; or allow the company to buy back his shares.

Remain a company shareholder

Our client could have remained a company shareholder indefinitely. However, he wanted a clean break and to cash in the value of his shares. Additionally, the company would not want a senior employee of a competitor to be a shareholder.

Share sale to third party

The articles of association contained pre-emption rights on share sales to a third party. Our client thought it unlikely that any third party would purchase his 15% minority shareholding.

Share sale to existing shareholder

We advised our client that selling his shares to one or more existing shareholders was straightforward. Legally, it would just involve signing a stock transfer form and short form share purchase agreement.

Done right, he would benefit from entrepreneur’s relief, because he was still a company employee and director. This would mean an effective capital gains tax rate of 10% on the first £10 million of lifetime gains.

However, finding existing shareholder(s) willing to purchase his shares at an agreed price proved difficult.

Selling shares back to a company

Selling his shares back to the company would be more complex. Additional legal and tax issues arose compared to selling shares to an existing shareholder.

However, after approaching the existing shareholders, a company share buyback looked the most viable option.

Tax on share buyback

We advised our client on the most tax efficient way for him to sell his company share.

Share valuation

We supported our client throughout the share buyback process. We assisted our client’s share price negotiations using our expertise in share and company valuation. This ensured our client received the maximum fair price possible for his shares.

Capital versus dividend

Our client was in the highest tax rate bracket and therefore he would have incurred significant tax upon a dividend of the share sale. We agreed in advance with HMRC that the distribution element of the consideration would not be treated as a dividend, but as capital. Thus the tax on the proceeds of the share buyback was the same as if our client sold his shares to a third party.

Capital requirements

HMRC required several conditions to be satisfied in order to treat the consideration as capital. Firstly that the company buying back the shares was an unquoted trading company. Secondly that the purpose of the buyback was to benefit a trade carried on by the company, and did not form part of a tax avoidance scheme. Thirdly our client had to be both a UK resident and the owner of the shares for more than 5 years. Finally, our client had to sell all of his shares in the company, meaning he would no longer be connected to the company after the sale.

Finalisation

Once the purchase price was agreed, we reviewed and negotiated the documentation to make the sale. The company’s legal advisers prepared these documents, which included: a share buyback agreement; ancillary documents including board minutes; Companies House forms; and shareholder resolutions.

  • Thanks to the hard work of Gannons, I was able to take up the job of my dreams having secured the best possible value of my shares in my old company.