Company Buy Back of Own Shares (1/5)
Companies Act 2006 allows a company to repurchase its own issued share capital, provided certain conditions are met. This type of transaction is sometimes referred to as a ‘share buyback’ or a ‘purchase of own shares’.
Where there is no other market for shares this may be the only way that shareholders can get the capital they originally invested in the company back.
Depending on the circumstances, the share disposal by the individual can be treated as either income or capital for tax purposes. Under the income treatment, the purchase is dealt with as an income distribution (ie a dividend). However, there is an exception for buybacks made by unquoted trading companies where, provided certain conditions are met, the seller is instead treated as making a capital disposal. (This will be explored in later articles)
An advance clearance procedure is available to obtain certainty on HMRC’s view of the tax treatment of the buyback.
Why carry out a purchase of own shares?
For shareholders in private limited companies, a purchase of own shares can offer a tax efficient exit route from the company. It may also offer a convenient way of buying out a shareholder without the need for a more complex share reorganisation or reconstruction.
There are a number of situations where a purchase of own shares may be appropriate but, typically, the main reasons for carrying out a share buyback in a private limited company are as follows:
- an exit route for shareholders ― for example, on retirement of a shareholder where there is no willing external buyer or in the case of a dissenting shareholder where there is disagreement about how the company should be run that cannot be resolved
- retaining ownership within the family ― for example, where it is a family company and the family want to keep the shares within family ownership but cannot afford to buy the shares back from the shareholder themselves personally
- a restructure of share capital ― a share buyback may be an appropriate option to eliminate or reduce a class of shares.
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