Purchase own shares

Purchase own shares

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Hi all

Out of office today, but client has spring a naughty on me, I'd appreciate any quick throughts before I unwind the mess on Monday.

Scenario: private co, 80% control family A, 20% person B.  No connection family A / person B other than friends and this shareholding.

Company needs more funds, B cannot afford to invest, so he is withdrawing and returning his 20% to family A.

Value of company unclear.  Balance sheet is neg, but goodwill good give a positive share value.  I'm assuming approx £500k value.

Clients originally wanted to transfer Bs shares, to A family members, I said fine, but need a GCT S165 election to hold over any CGT.  A family took umberage at this, I don't think they wanted to understand it - mental block.

I've chased them for status of matter, and received a reply that company has purchased back the 20% at par, £100.  A family have asked do we reduce share capital or leave the shares as treasury shares.  A little knowedge is a dangerous thing!  I can sort the shares issue out, I need some quick thoughts on the tax.

(a) purchase of own shares, afair, without research today, this is a distribution in hands of B unless the various criteria for treating as capital apply, in which case capital gain. 

(b) criteria are, as far as I recall, benefit of trade?  Are there any others?

(c) If its a distribution, is it at actual (i.e.) par or MV? 

(d) If its CGT is it at par/actual or MV?

The S165 gift holdover would have been so simple, but I fear the client has created a mess here.

Any quick responses welcome so I can think my Monday morning phone call through.

TIA

Replies (4)

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By cathygrimmer
07th Nov 2009 10:21

Purchase of own shares

The purchase of own shares, where the shares are cancelled, is not a market value transaction (even in a family company) as there has to be a disposal and an acquisition and the latter is missing. So the transaction will be at actual consideration. My understanding is that only PLCs can leave shares in Treasury - but I'm a tax specialist and not a lawyer so I could be wrong!

For distribution purposes, again it is actual amount paid. And it is only a distribution to the extent that it exceeds the original subscription price for the shares (including any premium). So the capital/distribution issue shoudn't cause you any problems here as the taxable distribution will be Nil (the amount received being no more than the amount originally subscribed). If the sharehodler subscribed at more than par value originally, he will have a capital loss.

If I can be of further help, please get in touch. I provide tax support to accountants. I'm in the office on Monday.

Regards

Cathy

[email protected]

0771 844 8505

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By User deleted
07th Nov 2009 19:05

?

Hi Cathy,

Can you expand on why the following? Me not understand.

"where the shares are cancelled, is not a market value transaction (even in a family company) as there has to be a disposal and an acquisition and the latter is missing. So the transaction will be at actual consideration".

It is not you, it is me!!!

thanks

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By cathygrimmer
08th Nov 2009 23:02

Expanding!

A company makes no acquisition when it makes a purchase of own shares from one of its shareholders as the shares are automatically cancelled. Therefore, a purchase of own shares is not caught by s. 18 TCGA 1992, which only applies where there is both an acquisition and a disposal between connected persons. The only way HMRC could apply market value to such a transaction would be to show that this is a bargain not at arm’s length (s17 TCGA 1992). Given that there is no family connection and the shareholder seems to have wanted out because he couldn't afford to shore the company up with more funds that sounds unlikely but, of course, isn't impossible. However, given that the deal has been done, I would work on the basis that it is a transaction at face value - i.e. £100 unless you have a good reason to feel you have to apply s17.

Off to bed now.

Cathy

[email protected]

0771 844 8505

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By garbetts
10th Nov 2009 16:01

Thanks, Cathy, most helpful.

Companies House rejected the purchase of own shares paperwork the client had submitted off thier own back, and I've now 'persuaded' the client that my original transfer / S165 suggestion is more robust.

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