Share sales vs company buy-back

What if a shareholder wants to sell their shares? Should the company buy them back, or should the shareholder sell to another buyer, usually an existing shareholder? Generally, a sale to another shareholder is more straightforward than a company share buy-back.

Share purchase by existing shareholder or company buy-back

If a shareholder sells to another shareholder, the seller may be subject to capital gains tax, while the buyer funds the purchase. Payment by instalments may be possible if agreed between the parties.

A company buy-back may be appropriate if:

• The company does not want another shareholder to increase their shareholding; or
• The buyer lacks the funds to purchase the shares.

Private company share buy-backs must comply with statutory requirements. The seller may be taxed on the proceeds as income or capital, depending on the circumstances. The company may also:

• Lack sufficient distributable profits to fund the buy-back, unless another lawful funding route is available.
• Be liable for stamp duty.

The company’s articles of association and any shareholders’ agreement should be checked for restrictions on share transfers and buy-backs.

Shares may be transferred by sale or gift, but the tax consequences can differ.

Private company share sale: tax issues

A sale at full market value may give rise to a capital gains tax charge, depending on the gain made during the seller’s period of ownership and any available reliefs.

A shareholder who gifts shares or sells them to other shareholders for less than market value may still be taxed by reference to market value, depending on the relationship between the parties and the circumstances.

Capital gains tax reliefs may be available to:

• Reduce the tax liability.
• Defer the tax liability.
• Provide other forms of tax relief, subject to the relevant conditions.

Private company share buy-back

A private company buying back its own shares faces different requirements from a public company acquiring shares on the stock market. The company must have a lawful funding route, which may include:

• Distributable profits.
• Capital, where the statutory procedure permits.
• Borrowing, subject to the company’s circumstances and legal requirements.

Private company share buy-back: tax issues

A shareholder selling shares back to the company may be subject to income tax, with the proceeds treated in a similar way to a dividend. Alternatively, capital gains tax treatment may be available if the relevant statutory conditions are met.

These conditions include ownership-period and shareholding requirements, as well as the requirement that the buy-back be made wholly or mainly for the benefit of the company’s trade, subject to the statutory exceptions. HMRC advance clearance can be sought where appropriate, although clearance does not guarantee that all conditions will be satisfied.

The tax outcome depends on the seller’s circumstances and the applicable rules. Capital gains tax reliefs may be available where the conditions are met; the applicable rates should be checked at the time of the transaction.

Articles of association & shareholders agreement

The articles of association and any shareholders’ agreement should be reviewed for provisions that may restrict a transfer or buy-back, including:

• Restrictions on the sale or transfer of shares.
• Pre-emption rights requiring shares to be offered to existing shareholders before they can be transferred to another buyer.