A company buyback of shares distributes profit. Done right, and shareholder payments qualify as capital. There is a process to satisfy. Done wrong, you lose the tax benefits or void the transaction. A company buyback of shares is a perfectly legitimate method of extracting cash from a private company. Hence share buybacks are popular with privately owned companies, owner managed businesses and family controlled companies.
We support both companies and shareholders considering a share buyback. A share buyback enables a private company to purchase its own shares from an existing shareholder. The process has complications set down by both HMRC and under company law. If the share buyback is incorrectly executed, it is void.
BUY BACK OF EQUITY SHARES UNDER THE COMPANIES ACT, | Corporate Law Reporter
The transaction can be unwound. The repurchased shares are treated as still belonging to the original shareholder.
Say the company directors fund a share buyback out of capital. Now, they are personally liable. Perhaps the share buyback is wrongfully reported as a capital gain. On the tax return, it should have been reported as an income payment. So, the tax return is incorrect.
HMRC imposes interest and penalties for incorrectly reporting tax. A share buyback is a transaction between an existing shareholder and a company.
Funding is from the company. A share purchase is a transaction between a shareholder and an independent third party buyer. Often, the directors must approve the purchase. Funding is from the purchaser. There is no impact on existing shareholders. The law does not fix the buyback of shares of listed company price for share buybacks from a shareholder.
The price is a matter of negotiation. However, the company must have sufficient distributable reserves to fund the share buy back.
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. If shares are issued in consideration for the buy back, the buy back will be void and the purchase price will become repayable. Funding share buybacks with borrowed money is generally prohibited for private companies.
Shares can be repurchased by distribution in specie e. Alternatively, the company could release a shareholder from an existing debt. However, the distribution will not receive capital treatment. There are restrictions on the in the Companies Act relating to payment for shares.
Quotes about earning money honestly protect shareholders by drafting guarantees and bespoke default clauses. Unless you qualify for capital treatment, shareholders are taxed on the payment received as if it was a dividend. An HMRC clearance enables shareholders to plan.
For share buybacks clearance takes weeks. We will review your requirements for shareholder approval to the company share buy back. If you lack the requisite shareholder approval, the transaction is potentially void. We prepare the documentation needed to implement the company share buy back.
Typically, the documents required for a share buyback include:. If you repurchase shares out of capital, then you require further documents and a Law Gazette announcement to notify potential creditors.
Buy Back of Shares
We will deal with stamping and notifications required to HMRC. A share buyback is a multi-stage transaction. It requires advance planning to be correctly structured, and executed with attention to details. If it goes wrong, the company is embarrassed, and shareholders may face an unplanned tax liability. Sometimes the buyback arises because an employee or director is leaving the business. We resolve acrimonious situations. We execute share buybacks to your maximum advantage, due to our rare combination of commercial and tax expertise.
Gannons combines tax and commercial expertise. Share buybacks done right are advantageous. Done wrong you can lose entrepreneur's relief, and face personal liabilities. Why not call or email me to arrange an informal discussion.