A ‘company purchase of own shares’ can be a tax-effective way for a shareholder to cease his or her involvement with a company (typically on retirement or to resolve irreconcilable differences).
Sometimes a buyback is complicated by the company’s inability to raise the funds to pay for all the shares in one go. Where this happens, buying them back and leaving part of the proceeds unpaid and outstanding as a debt is not usually possible as a matter of company law. Completing the buyback, paying the agreed price and immediately borrowing back some of that amount from the vendor may solve the company law problem but will often result in the vendor’s paying income tax rather than capital gains tax on the buyback. Happily, it’s hitherto often been possible to resolve both company law and tax difficulties by structuring the buyback as a single contract with completion in tranches.
A note recently issued by HMRC threatens to throw a spanner in the works.
In contrast to the position often taken in the past, HMRC have announced that they will in future take the view that for tax purposes the vendor will be treated as continuing to ‘possess’ the shares of which he or she continues to hold legal title pending completion (regardless of whether beneficial ownership has passed under the contract). The significance of this is that it will often mean that income tax treatment will apply to the buyback.
However, all is (probably) not lost. By making suitable alterations to the company’s share structure at the time of the buyback it should in many cases be possible with care to extract the spanner from the works and restore the previous position. One has to wonder, though, (with apologies for mixing our metaphors) why such hoop-jumping should be necessary to avoid a purely technical difficulty.
For more information, please get in touch with your usual BKL or use our enquiry form.
Our article from February on share buybacks is available here.