Company Reorganisations – Purchase of Own Shares or ‘Share Buy-Backs’

Introduction to company reorganisations

The introduction of Companies Act 2006 gave companies the ability to repurchase or ‘buy-back’ its own issued share capital, on the provision that specific conditions are met. Once purchased, the shares can be cancelled (the usual route) or they can be retained by the company as “treasury shares”. 

A share buy-back is a potentially tax efficient method of restructuring the shareholdings of a private company and can be useful in providing an exit strategy for shareholders. However, those involved should proceed with caution, as the tax liability/treatment can vary considerably depending on circumstances of the transaction. 

Tax treatment 

The shareholder selling the shares will be taxed on the sale of their shares to the company and the treatment of this transaction will fall into one of two categories:

• Income Treatment 

Generally speaking, a share buy-back is a distribution from a company and is therefore (in rule – CTA 2010 s1000) treated as an income distribution. E.g. it is broadly the same as paying a dividend to a shareholder. This distribution is subject to Income Tax.

• Capital Treatment 

Where certain conditions are met, CTA 2010 s1033 provides that a shareholder can be treated as receiving a capital receipt rather than income. If the purchase consideration is treated as capital, the disposal is subject to Capital Gains Tax. 

The difference between the tax rates for income distributions and capital gains is significant as obtaining a capital tax treatment could reduce the applicable tax rate. This is why it is essential for vendors to understand their position for future tax planning. 

In respect of this, an advance clearance procedure is available for individuals/companies to obtain certainty from HMRC on the tax treatment of the buy-back. 

What are the conditions required for capital treatment? 

CTA 2003 s1033 provides that the purchase consideration can be treated as a capital receipt if the buyer is an unquoted trading company, and if either condition A or B is met. 

Condition A:

• The purchase is made wholly or mainly for the purpose of benefitting a trade carried on by the company or any of its 75% subsidiaries, and;
• The purchase does nor form part of a scheme or arrangement which aims to enable the share owner to participate in the company profits without receiving a dividend or for the avoidance of tax. 

OR

Condition B: 

• The whole or substantially the whole payment is applied in discharging a liability of that person for inheritance tax charged on death, and;
• It is applied within two years after the death.

Reasons for carrying out a share buy-back 

• It provides an exit route for shareholders who want to sell some or all of their shares, but who cannot find a willing buyer. This is a common route in retirement.
• It can help to retain ownership within a family company, whereby the individual family members are unable to buy out the shares personally. 
• It can held to restructure the share capital within a business, by eliminating or reducing a particular class of share or through purchasing redeemable shares in advance of their redemption date. 

If you have any questions about this article or company reorganisations in general please do not hesitate to get in touch.