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13 September 2018
A company buyback of shares is a popular route for shareholder exits. In many cases the payment on the buy back will qualify for capital treatment and taxed at lower rates of tax than dividends. Our job is to handle the transaction to put you in the best position commercially and from a tax perspective.
We are always happy to discuss your situation and provide a scope and fee estimate. Please do give us a call.
We are a specialist law firm with a strong tax capability made up of solicitors, members of the Chartered Institute for Taxation and the Chartered Institute of Accountants. We combine tax law with the practicalities.
In order to guide you on how to manage the company buy back of shares we have set out below some pointers.
A company buyback of shares is a perfectly legitimate method of extracting cash from a private company. Company buy backs are a route for shareholders (including shareholders who are directors or employees) to realise value for their shares.
We support both companies and shareholders considering a share buyback.
There are some basic rules behind which detail sits.
There are differences between a share buy back and a share purchase. The differences do impact on the commercial viability of transactions.
A share buyback is a transaction between an existing shareholder and a company.
A share purchase is a transaction between a shareholder and an independent third party buyer or an existing shareholder of the Company.
Tax law does not prescribe the price per share to be distributed by the company to pay for the share buy back. The price is a matter of negotiation between the directors and the shareholder. There is an HMRC requirement that the share buy back must be for the benefit of the company. To distribute excessive amounts on paying for the shares bought back by the company can in some circumstances fall foul of this HMRC requirement.
The company must have sufficient distributable reserves to fund the share buy back. If the funds are not paid from distributable reserves liabilities can arise.
A company can raise money by issuing new shares and using the subscription monies to fund the company share buy back from a departing shareholder. Where the company issues new shares to raise money for the buy back it needs to make it clear that this is the purpose of the share issue.
Shares cannot be issued as consideration for the buy back.
Funding share buybacks with borrowed money is generally prohibited for private companies. We review and discuss HMRC approved ways to restructure the company before the buyback to get around any problems.
Shares can be repurchased by distribution in specie e.g. maybe the company owns property, and this asset could be distributed to a shareholder. Alternatively, the company could release a shareholder from an existing debt. However, the distribution will not receive capital treatment.
If distributable reserves are likely to build up in the future a staged buy back can be attractive. Under a staged buy back all of the shares are bought back by the company but payment is deferred over a period of time. There are restrictions in the Companies Act relating to payment for shares. The result is that the shareholder must protect himself against the company’s default in paying for the shares at later stages. We protect shareholders by drafting guarantees and bespoke default clauses.
HMRC have put the spotlight on company share buy backs using deferred consideration. There are new risks to navigate around.
Unless you qualify for capital treatment, shareholders are taxed on the payment received as if it was a dividend. HMRC’s key requirements to treat the buyback as capital include:
If the tax payer qualifies for capital treatment it is possible to obtain a tax clearance from HMRC to this effect. To be successful HMRC need to be provided with details in their agreed format along with accompanying documentation for the company share buy back. We can draft the documentation and handle the HMRC clearance for you.
There is no point in applying for an HMRC clearance in cases where it is clear that the receipt will be taxed as a dividend.
A company buy back within an EIS company within three years of the EIS investment can cause the EIS investors to lose their relief. We are always happy to look into this for you.
We will plan for your company share buy back and oversee implementation for you. There are stages to work through as follows:
We review the articles of association. We will tell you if there are restrictions that prevent share buybacks, e.g.
Given advance warning, we can usually navigate any restrictions.
We prepare the documentation needed to implement the company share buy back. Typically, the documents required for a share buyback include:
If you repurchase shares out of capital, then you require further documents and a Law Gazette announcement to notify potential creditors.
We will review your requirements for shareholder approval to the company share buy back. If you lack the requisite shareholder approval, the transaction is void unless subsequently ratified. Usually, 75% of shareholders have to vote in favour.
If the purchase price exceeds £1,000, the company pays ad valorem stamp duty on the purchase price of shares. We will deal with stamping and notifications required to HMRC.
I needed to know how much my shares were worth and if I should sign the share transaction paperwork. I received clear advice and was pleased with the outcome.
I worked with the team on a share buy back which included cancellation of my shares. It was a tricky situation but it was well handled.