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.
Company share buybacks are also commonly known as a company purchase of own shares.
We are always happy to discuss your situation and provide a scope and fee estimate. Please do give us a call.
Benefits of working with us
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.
We have handled many company purchases of their own shares in our time. Familiarity with the practice area brings expertise and cost savings.
- Accountantsrefer clientsto us in thisspecialist area.
- Combining legal and tax expertise means that we can draft the agreements HMRC will need to review before giving clearance. We also deal with the share buyback agreement, shareholder resolutions and filings at Companies House.
How a share buy back works
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. The legislation is strict but our experience ensures legally sound solutions.
Company share buyback rules
The company uses its post-tax distributable reserves to pay for purchase of it’s own shares. If the company does not have the cash available to pay for the shares the company cannot buyback the shares. A way around this is often to agree a buy back of shares in instalments.
The company cancels the shares bought back. This means thatall remaining shareholders gain an increased share entitlement asthere are fewer shares in issue.
If the shareholder is either an employee or a director at the time of the company share buyback and has held the shares for at least 5 years the profit the shareholder makes is taxed as capital at the rate of 10% CGT. If the shareholder is not an employee or director but has held the shares for at least 5 years the profit the shareholder makes is taxed as capital at the rate of 20% CGT.
In other cases the profit made by the shareholder is taxed as a dividend.
Purchase of own shares vs share purchase
There are differences between a share buy back and a share purchase. The differences do impact on the commercial viability of transactions.
Share buybacks – key points
Ashare buybackis a transaction between an existing shareholder and a company.
- The company can repurchase its shares at any price.
- Shareholder approval is required.
- There must besufficient distributable reserves.
- Funding for the transaction is from the company.
- All remaining shareholders receive an uplift.
Funding a company share buy back
Tax law does not prescribe the price per share to be paid 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 circ*mstances fall foul of this HMRC requirement. The basic methods of financing a company buying back it’s own shares are :-
Distributable reserves
- The company must have sufficient distributable reserves to fund the share buyback. If the funds are not paid from distributable reserves liabilities can arise.
- The directors can be held liable for acting in breach of their duties.
- Other shareholders can attack the company share buyback transaction and void the contract.
- HMRC can deny beneficial tax treatment for the shareholder.
Buy back from a new share issue
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 beissued as consideration for the buy back.
Buy back from borrowing
Funding share buybacks with borrowed money is generally prohibited for private companies. We review with clients and discuss HMRC approved ways to restructure the company before the buyback to get around any problems.
Alternatives to distributable reserves
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.
Deferred company purchase of own shares
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 which means that shareholders need to get protection against the company’s default in paying for the shares at later stages. We protect shareholders by drafting guarantees and bespoke default clauses.
HMRC haveput the spotlight on company share buy backs using deferred consideration. There are new risks to navigate around.
Taxation ofa company share buyback
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:
HMRC conditions for share buyback
- The shareholder must have held the trading company’s shares for five years;
- The departing shareholder’s holding must substantially reduce;
- There must be a solid business case; and
- The buy back cannot be a part of a tax avoidance plan.
There are structures we can consider if the shares have not been held for five years which will result in capital treatment.
HMRC clearance for company share buybacks
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 incases where it is clear that the receipt will be taxed as a dividend.
Steps involved in a share buyback
The significant work and time required with a Share Buyback transaction takes place before and after (including payment of stamp duty, corporate filings and dealing with HMRC) the signing of the agreement to ensure that the buyback of shares complies with the strict procedure set out in the Companies Act 2006.
In terms of approval of a share buyback, shareholder agreement is needed. The transaction and the terms must first be approved by the shareholders, usually by way of an ordinary resolution unless the company articles of association provide otherwise.
We can plan for your company share buy back and oversee implementation for you. There are stages to work through as follows:
- Background review of the articles and shareholders agreement before the share buy back;
- Drafting the share buy back documentation;
- Obtainingshareholder approval; and
- Filings with HMRC for stamp duty and Companies House.
Share buyback Agreement
Because it is the company that is buying the shares from a shareholder, a Share Buyback Agreement is relatively straightforward compared to a situation where a buyer is looking to buy all the shares in a company.
We prepare the documentation needed to implement the company’s purchase of its own shares. Typically, the documents required for a share buyback include:
- A share buy back agreement;
- Board meeting notices for members;
- Board meeting minutes to seek members’ approval for share buy back;
- Written resolution to approve share buy back;
- Stock transfer form; and
- Company House filings.
If you repurchase shares out of capital, then you require further documents and a Law Gazette announcement to notify potential creditors.
A few examples of our work
To get an idea of our approach and how share buybacks can work in practice, please do read some of our client case studies :-
- Tax issues on a share buyback
- Forced share buyback
- Brief summaries of share buy back instructions
