Company Purchase Of Own Shares
Income Tax or Capital Gains Tax ...
What can you do if you have both cash and lots of shares in your business, or an exiting shareholder has lots of shares in your business? The answer could be a purchase of own shares or a capital reduction ...
Company purchase of own share is a fairly common situation!
copyright: solarseven / 123rf stock photo (licensee)
A fairly common situation in a private company is where there are several shareholders, and one wants to sell their shares and the others are unwilling or unable to buy them.
"So why not get the company
to buy them?"
Firstly, remember that this is a technical area and there are a variety of issues, both legal, tax and accounting that need to be dealt with.
The Companies Act allows for a reduction in share capital, and the basic legal steps are to pass a special resolution, together with a statement of solvency.
Private companies, as opposed to PLC's, can a) redeem or purchase their own shares or b) reduce their share capital. And yes these are two different things that achieve the same objective.
The selling shareholder does need to think about tax though. Depending upon the way the company structures the deal, the shareholder will be taxed on either Income tax or Capital Gains Tax, both of which have entirely different tax outcomes.
The good news is that typically the tax rules apply to make it a capital gain, but there are conditions that need to be adhered to. The company needs to make a special tax return to HMRC about this.
The accounting rules vary slightly depending on the shape of the transaction. If the company is purchasing its own shares, then it does this by reducing its retained earnings or accumulated profit and loss reserve and creating a capital redemption reserve. A reduction in capital, as the name suggests, actually reduces the value of the company's balance sheet.
"Would you like to know more?"
If you are in this situation then remember you need to take professional tax and accountancy advice before going ahead, so get in touch on 0333 335 0422 or click here to ping over an email and let's see how we can help you!
Until next time ...
I've been an accountant in and for business since 1987 and have a wide experience of consultancy, audit, accounts, taxation and wealth planning work from individuals and small businesses to multinational corporations and charities.
My eclectic interests in growing and developing business span a number of areas … and can be summarised as strategic business advice and tax saving advice.
I have worked with the Chamber of Commerce to deliver courses for people about starting up in business and have lectured about tax for a major accountancy practice and for Milton Keynes College.
I relax by reading fiction and by getting away from the office in a campervan.