Purchase of own shares

Purchase of own shares

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My clients expect to sell goodwill and other assets of their business but do not expect a prospective purchaser to want to buy their family trading company, through which the business has run for many years.
The majority shareholder (M) would like to keep the company with a view to running a different business out of it – in the future when he is semi retired. It is likely that the minority shareholder (S) would accept a job offer to run the old business as manager for the new owners.
In order for M to own the company outright to uses as vehicle for his new venture he proposes that the company buy back its own shares from S.
As I understand it for capital treatment the purchase of own shares has to be for the benefit of the trade. Does it matter that the continuing trade will be a new business? The buyback could not be funded until the proceeds of the sale of the old business had been received. Also the new business may take a little while to get going and will require considerable capital outlay, so again this cannot really start until after the old business has been sold.
Is there a problem here?

Angela Riley

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By Exector
19th Dec 2007 17:38

POS
Since capital treatment is subject to an HMRC clearance facility., why don't you put the case to the Inspector in a pre-transaction clearance application under s.225 ICTA 88?

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By kenmoody
20th Dec 2007 10:00

Fair enough ...
... but I'd have thought it was implicit in section 219 that it has to be for the benefit of an existing trade and if that trade is being sold then it clearly can't be. You can do this as a management buy out if you really want to but is it worth it? Might they not be better to liquidate or dissolve the existing company and 'harvest' (I hate that expression but I suppose it's apt) BATR. M could always form a new company and there may be something to be said for it being unincorporated to begin with, with a view to selling to a new company when it gets off the ground. This will be less attractive with a CG rate of 18% but still beats 32.5% or 40% so the sale price could be left on DLA and used for drawings.

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