A company may purchase its own shares from an individual shareholder whereby they are effectively cancelled so that any remaining shareholders’ interests are increased.
Regardless of the applicable tax treatment, there are a number of company law requirements which need to be met in order for a purchase of own shares to be undertaken. If these formal conditions are not met then the arrangement could be invalidated.
For tax purposes, a purchase of own shares by a company will ordinarily form an income distribution in the hands of the shareholder whereby it will be subject to income tax and taxed in a very similar way to a dividend. However, if certain formal conditions are met then the purchase of own shares may be treated as a capital distribution. In these circumstances, the disposing shareholder will be subject to capital gains tax and can claim business asset disposal relief. If available, this may give rise to a maximum capital gains tax charge of ten percent (subject to the £1 million lifetime allowance).
It is possible to apply to HM Revenue and Customs for advance statutory clearance that the necessary conditions have been met for the capital treatment to apply.
If effective, the above can be a very efficient strategy for the remaining shareholder(s) to increase their interest in the company without funding this personally whilst enabling the departing shareholder to secure a low capital gains tax charge on his disposal.
The company will incur a stamp duty charge at a rate of ½ percent of the consideration paid.
Freestone Jacobs has vast experience in advising shareholders of the best option for their particular circumstances and then implementing the most appropriate strategy to achieve their objectives. For more information please contact us.