Accounting for a company buying 5% of its own shares
A limited company has three shareholders, one of which is a 5% shareholder, one a 7% shareholder and one an 88% shareholder. The 5% and 7% shareholders were employees who subscribed for shares 8 years ago on incorporation. At the time a share premium account of circa £60k was established.
The 5% guy wants to sell his shares and the most likely route is for the company to buy and cancel them. I understand that CA2006 made this much easier to do and that it is possible to utilise the share premium account as part of the solution.
5% of the shares have a nominal value of £5 and the disposal is likely to be for £12k. The company has distributable reserves of £150k and no material creditors.
In terms of debits and credits, I can see a credit to the bank account of £12k and a debit to share capital of £5 but I'm not clear where the remaining debit(s) of £11,995 go. It would be nice to be able to reduce share capital by £5 and reduce the share premium account by as much as we can and not to have to create any new capital reserve, so the accounting questions are:
- Can there be a debit of any value to the share premium account?
- Does the balancing debit go to retained profits? ( I would expect a large part of the debit to land here)
- Does the company need to set up any capital reserve to maintain the current balance sheet value of it capital ( I would hope not as the capital cushion set up on incorporation is now not required either to finance the company or to protect creditors)
One small extra question - would I be right to assume that any difference between the £12,000 paid to the shareholder and the money he paid to subscribe for the shares would be treated as income rather than a capital gain?
Thanks for your help either as a direct answer or a link to the answer if it is already here somewhere.
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