Share buy-back or dividends

Share buy-back or dividends

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XYZ Limited is equally owned by three shareholder / directors. The company has been trading for five or so years and makes circa £150k pbt each year.

The directors are wondering if, instead of declaring a dividend, they could carry out a share buy back. They would all remain equal shareholders and simply sell the same number of shares each back to the company.

I suspect it's not a good idea but what are the top 3 reasons why it's not a good idea?

Alternatively, if it's a good idea, why doesn't everyone do it?

Michael

Replies (3)

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By blok
24th Nov 2010 08:32

.

Only 1 reason needed.

The proceeds from the share buy back will be treated like a dividend for tax purposes because you wont meet all the conditions required to get it as capital.  So you will be ne further forward, just some paperwork for nothing.

Take a look at section 1033 CTA 2010 onwards and you will see why.

Regards

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By Coates Franklin Ltd
24th Nov 2010 10:13

Agree with blok

No tax advantage and more paperwork to do.

Presumably you thought you could get the distribution treated as capital (rather than income) and hence save some tax?  If so, there are strict conditions to meet which your situation doesn't.

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By MBK
24th Nov 2010 13:15

But if they each put in a load of share capital at the start...

.... you could do a share capital reduction under CA 2006, and the proceeds would be tax free.

No use, of course if there is only a small amount of share capital.

And a bonus issue of shares capitalising profit followed by a reduction of share capital doesn't work! They thought of that one!

 

 

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