Purchase of own shares

Where an individual shareholder wishes to exit (through retirement or due to different views on how the business should be run) a multi-shareholder unquoted company, for cash consideration, a purchase of own shares (PoS) is often a good solution. By the company funding this share buy-back, this cost is not  from ‘after personal tax’ monies (which would be the case if another individual made the payment). This can save a substantial amount of income tax.

As you would expect for a generous outcome, various criteria have to be met to be eligible for a PoS. For the company to be eligible to make the transaction:

Legal

• A PoS must not be prohibited by the companyʼs Articles.
• The company must have other shares in issue after the PoS.
• Any shares repurchased must have been fully paid up.
• The company must pay for the shares in cash in full at the time of the repurchase.

Distributable Reserves

• The company must have sufficient distributable reserves to fund the purchase (the premium over nominal value).

Favourable Tax Treatment

For the individual shareholder to be eligible for the receipt to be taxed on them as a capital receipts, rather than income/dividend receipt:

• The purchase must be made wholly or mainly for the purpose of benefiting the trade carried on by the trading company or any of its 75% subsidiaries.
• The seller must be UK resident and have owned the shares for at least 5 years.
• There must be a substantial reduction in the seller’s shareholding (must be 75% or less of what it was before the buyback).
• The seller and their associates must not be connected to the company after the purchase takes place (including, the seller must not own more than 30% of the shares following the buyback).
• The repurchase is not be made for the avoidance of tax.

Best advice, to increase the chances of getting this tax treatment, is to use the HMRC advance assurance procedure.

Process

• The transaction must be pre-authorised by shareholder ordinary resolution before the contract is entered into (the shareholder who is party to the transaction is not permitted to vote).
• A purchase of own shares agreement must be signed off.
• The payment can then be made.
• The company must pay the stamp duty (at 0.5% of value, if it exceeds £1,000, rounded to nearest £5) to HMRC.
• SH03 and SH06 returns must be completed and delivered to Companies House within 28 days of the shares being delivered to the company.
• A copy special resolution must be filed at Companies House.
• The company must report details to HMRC within 60 days of the share buyback.
• Statutory registers must be updated.
• The next statutory company accounts after the transaction should make a transfer from Ordinary Share Capital to Capital Redemption Reserve in respect of the nominal value redeemed.

Disclaimer - All information in this post was correct at time of writing.