Recent implementation of company buy back of shares
A company buy back of shares is a popular way of allowing shareholders to transfer their shares for valuable consideration where there is not a third party buyer. The company uses profits which would otherwise be accumulated or paid out as a dividend. If the facts fit, the shareholder can benefit from paying tax on the profit at only 10% – this is a much lower rate than that applicable to dividend income.
As with everything, there are procedures and rules to follow to secure the advantageous treatment.
Highlighted below are some of our recent cases where we successfully concluded a company buy back of shares.
We help both companies and individual shareholders achieve agreement.
Company buy back of shares from a shareholder leaving the business because of ill health
Our client operated in the optical services industry. One key director/shareholder suffered a stroke. He could no longer participate in the company’s decision making. The corporate documentation required him to participate in shareholder decisions. There were not enough directors to hold board meetings (there was not a quorum). Unfortunately, the company lacked sufficient cash to repurchase his shares in one lump sum.
Buy back outcome achieved
To resolve the company’s cash-flow problems, we structured deferred consideration into the buy back. We prepared a schedule of payments so the shares would be sold back over time (with a proviso that the company would only buy the shares if it would not be sold back over time). In this instance, since the shareholder was no longer an employee or director the shareholder did not seek Entrepresneurs’ Relief (10% capital gains tax rate).
Shareholder paid off via a company buy back of shares following a fall out
Our client sold security locks, and the company owned many properties. However, one shareholder wished to leave the business. Because of the property portfolio, it was unclear if the company qualified as a trading company for capital gains tax purposes. We analysed the company’s trading history, and its balance sheet.
Successful share buy back with Entrepreneurs’ Relief
We persuaded HMRC that the company did not carry out investment activities to a substantial extent. Hence the company qualified for capital treatment. We therefore completed all the paperwork to allow a share buy back and the shareholder departing the business qualified for Entrepreneurs’ Relief on the buy back.
Fixing a value on the shares bought back
There was debate around the value per share at which the company could buy back the shares. Working with the directors they arrived at the sensible valuation that would stand up to scrutiny by following an established valuation formula. If there was to be a review by HMRC they would want to see the approach set out in board minutes which we drafted.
Company buy back of shares used to resolve an acrimonious situation
In this case we structured a shareholder-directors’ exit from an insurance brokerage where there was a shareholder deadlock. The company’s articles of association did not deal with shareholder deadlocks and there was no back up under the shareholders’ agreement. We ensured the sale of shares would be treated as capital for capital gains tax purposes. There was tension which needed a calm steer from us to find the way to resolution by completion of the share buy back. Again, the company lacked sufficient funds to buy all the shares at once. The departing shareholder director was keen to qualify for Entrepreneurs’ Relief.
A successful result with HMRC
We successfully applied to HMRC for clearance on the basis of a split of the beneficial and legal interest of the shares. So the shareholder director was paid in installments.
We advised the company on the procedures required to implement the buy back of shares. This included making sure the correct shareholder resolutions were obtained and filed at Companies House. If the company law procedures are not followed the risk is the transaction could be undone by any one of the shareholders.
Restructure as alternative means of buy back of shares
Two shareholder directors of an IT consulting company had fallen out. Once again, the company lacked the funds to buy out one of the shareholder directors outright. There was a bank willing to lend the money to buy the shares. For the company, this did not help. There are legal restrictions on a company borrowing money to buy its own shares.
Restructure and share buy back success
However we implemented a restructuring which put a new holding company in place. That new company was allowed to borrow money from the bank to buy the shares. HMRC gave clearance that the restructuring could be tax neutral. Unlike the scenario above, there was a completely clean break as all the shares were purchases at completion.
It is easy to get this wrong and lose all of the benefits