Share buy-backs: Get the details right
Jennifer Adams responds to recent Any Answers queries with a summary of the requirements for companies that want to buy their own shares.
According to investment fund managers at St James’ Place, cost cutting for many companies has produced better than anticipated Balance Sheets - in particular cash reserves. This surplus cash is being wasted, languishing in minimal interest deposit accounts such that companies are seeking alternative avenues for investment.
Rather than taking on more employees, building more factories, or reducing debt any further, the money is being used to buy back their own shares because the smaller the number of shares the greater the earnings per share and greater the potential dividend payout. A number of Any Answers queries highlight another popular application: the paying off of a shareholder because the other shareholders are unable or unwilling to purchase the shares themselves.
Share buyback rules are complex and the article that follows is in the form of a checklist that condenses the technical requirements under the following basic headings:
- Funding a share buy back
- Tax position
- Conditions for CGT treatment
- Company Law Conditions
- After purchase
- Final Points
The detail is to be found in CTA 2010 s1033–1048; CTM 17505, CG58600; and SP2/82 (PDF download).