Share Buy Back Multiple Completion Checklist Reply

Young woman with checklist over shoulder shot

Exit planning is critical if you want to save tax.

Typically when a shareholder wants to leave a business, the company will buy back the shares, but often the company wants to pay in stages to ease the cashflow.

The problem is that buy back in stages generally means that Entrepreneurs Tax Relief can’t be used and to make things worse the buybacks will be tax as a distribution.

The Companies Act prohibits buy back by instalment, however HMRC Tax Bulletin 21 says…

The Board can only consider a request relating to a transaction which appears to be a valid PoS. The Companies Act 1985 lays down certain procedural rules which must be followed. Also, the consideration for the shares must be paid immediately and must be paid in money. The first of these requirements means that payment by instalments is not possible. It is, however, possible to make a contract under which successive tranches of shares are to be purchased on specified dates.

So here is checklist of things to consider to create a multiple completion:

  1. Ask HMRC for advance clearance – the buy back will be treated as a single event and subject to Entrepreneurs Tax Relief on the whole amount on day one
  2. Make sure your solicitor draws up an agreement that transfers beneficial interest on day one whilst retaining a legal interest
  3. Whilst the shares still exist beneficial interest has been disposed of
  4. Voting rights can no longer be exercised
  5. The creditor for deferred completion must not be loan capital

Clearly you will need professional advice from your solicitor and accountant to create a multiple completion contract.

steve@bicknells.net

Will your Share Buy Back pass the ‘trade benefit’ test? Reply

Successful Businessman With A Contract In Hand

Often as part of an exit strategy or succession planning companies will buy back shares.

Setting aside the mechanics, nicely explained in the ACCA Technical Factsheet 177 and the need for S1044 CTA 2010 clearance, the Buy Back has to be in the benefit of the trade not just the shareholder.

For example….

If the purpose is to ensure that an unwilling shareholder who wishes to end his association with the company does not sell his shares to someone who might not be acceptable to the other shareholders, the purchase will normally be regarded as benefiting the company’s trade.

Examples of unwilling shareholders are:

  • an outside shareholder who has provided equity finance (whether or not with the expectation of redemption or sale to the company) and who now wishes to withdraw that finance
  • a controlling shareholder who is retiring as a director and wishes to make way for new management
  • personal representatives of a deceased shareholder, where they wish to realise the value of the shares
  • a legatee of a deceased shareholder, where he does not wish to hold shares in the company

Assuming that the shares aren’t being bought back at Par Value, basic rate taxpayers will probably prefer dividends for any surplus where as higher rate taxpayer will want capital treatment.

Share Buy Back is complex, make sure you seek professional advice.

 

steve@bicknells.net