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Share buy-back - Tax position

I have a client (A) who owned 50% of a private limited company. A and the other 50% owner (B) disagreed on how tthe company should operate and it was decided that the company would buy back the shares held by A.  An Off-Market Purchase Agreement was drawn up and the company paid A £70,000 for his one share that originally cost £1. The disposal would normally be treated as a capital gain for tax purposes with entrepreneurs relief available if all conditions were met. Under S.1035 Companies Act 2006 the seler (A) must have held the shares for 5 years. A has only held them for 2 years. My thoughts are that instead of a capital gain the £70.000 payment will be treated for tax purposes as a distribution. A will receive the 10% tax credit and will then be liable at the dividend rate on the gross amount..

I would appreciate any comments concerning the above.

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05th Feb 2013 11:00

I think you are correct but I would have thought about setting up Newco which buys the shares off A, whilst B takes 100% of Newco.  A may then have been able to claim ER on the disposal - but B may not have wanted a Newco and of course the tax liability of A is not his problem.

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I'd agree...

... that you now have a £69,999 (net) dividend.

Unfortunately, planning after a transaction has taken place is rather difficult.

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05th Feb 2013 11:47

clearance & SSE for corporates

you can refer to the HMRC clearaance team and ask if it is a gain or a distribution.

 

usually the gain is more attractive unless your client is an hr taxpayer

 

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By BKD
05th Feb 2013 11:50

You can indeed ask, David ...

... but

(a) in advance of the proposed transaction; and

(b) no point if conditions for capital treatment are not met

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By RWACEM
05th Feb 2013 13:19

Thanks for your comments. Unfortunately I was not in a position to change the deal at the time.

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....
Would first solution above (ie a newco to purchase A's shares) fall within Transactions in Securities?

If there is a share premium account then this may reduce the amount of distribution.

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By hiu612
11th Feb 2013 12:25

5 years

If you keep going through CTA then there are some exceptions to the 5 year rule, notably the aggregation of any period of ownership of a spouse and, if memory serves, a relaxation for inherited shares. Perhaps one of these will offer a get out of jail free card?

 

Alternatively, if the transaction can be found to be in breach of company law, it might be possible to void the transaction and then start again. A bit more involved, and only worthwhile if there is plenty of HR tax at stake.

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By hiu612
11th Feb 2013 12:25

5 years

If you keep going through CTA then there are some exceptions to the 5 year rule, notably the aggregation of any period of ownership of a spouse and, if memory serves, a relaxation for inherited shares. Perhaps one of these will offer a get out of jail free card?

 

Alternatively, if the transaction can be found to be in breach of company law, it might be possible to void the transaction and then start again. A bit more involved, and only worthwhile if there is plenty of HR tax at stake.

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12th Feb 2013 09:06

Yes, check the paperwork

it sounds as if someone has been attending to some of the details - for example having a purchase agreement, but if they missed the critical share ownership qualification perhaps they may have inadvertently made further errors, difficult when you have just the two shareholders. A "howler" that is surprisingly common is finding that written resolutions are drafted allowing the exiting shareholder vote on the resolution to purchase his own shares.

I note that sometimes the courts can be more flexible with smaller companies about the need to circulate the agreement - here there would only have been the one person to agree to it, and so difficult to try and call a breach if it was not circulated in time but he still agreed to it.

Other idea is to double check the Articles, it is highly, highly unlikely but there may have been some special rule concerning buy backs.

Virtual Tax Support for Accountants: www.rossmartin.co.uk

 

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