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).

 

Continued...

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Comments

Capital reduction by solvency statement

Richard.Gillin | | Permalink

Is there a tax reason why a repurchase from capital must be done after distributable profits used up / from proceeds of new issue? Or would the new capital reduction by solvency statement route available under the 2006 Act also work?

Nichola Ross Martin's picture

Out of capital

Nichola Ross Martin | | Permalink

Yes, that can be done providing that the Articles permit it and the directors tick all the right boxes (ie. do what is required in s643 and 644 CA 2006) and file SH19 and pay a fee. It is not difficult it just takes up a lot more time to execute and requires carefully thought and signatures.

I love the comment about the investment managers at St James! Have these guys ever tried to execute a repurchase?

Never, ever, under-estimate the amount of time it takes to check off the requirements of CTA 2010 (start at s1033 and take it step by step). S1044 clearance is essential (refer to SP 2/82) and follow the reporting requirements in s1046.

Virtual tax support for accountants (and assistance with repurchases): www.rossmartin.co.uk

alternative to ESC16 ?

kiwilondon99 | | Permalink

shareholder A=99  B=1   [ related]

reserves = several k

could company go through the process and buy back several shares - say evey 2 or 3 years as aCGT event, in part of course to reduce corp cash sitting around on zip style interest, and also "presumably" allowing the shareholder[s] to use personal CGT allowances   Shares of course cancelled on buy back [ no treasury! ]

is the principle correct? and an available option for the co

Not an alternative to ESC C16

coops1279 | | Permalink

For capital treatment:

"Post- purchase the vendor (and any associates’) nominal share value and interest in profits must be substantially reduced (meaning 25% or less); the vendor must also no longer be ‘connected with’ the company (ie hold less than 30% of the company’s issued ordinary share capital or share and loan capital or voting power)."

This stops a shareholder selling small chunks of shares to use annual exemptions.

Share buy Backs

dhaval_19 | | Permalink

What happens if there is only one shreholder in company.. who has 10 shares in company with reserve sitting is several K..

Can his company can buy back 5 shares with original share price paid + share premium and seller claim this payment in his personal tax return as Enterpreneur relief as he is holding shares since last 5 yeras...and all other criteria are covered..

Is the above situation will be acceptable by HMRC...as he is only one shreholder..who will sell half of his shareholding to the company and claim Enterpreneur releif..

 

Share purchase on death

jbayman | | Permalink

Where the purchase is from the estate, and is to be funded by the proceeds of a life assurance policy held by the company, I am interested in how the sum assured is treated.

We know the purchase has to be made firstly from distributable profit, but the cash from the life policy will have been receved tax free (the purposes of the cover being a capital one) and therefore one assumes does not attach to the distributable profit. So how would it be entered in the balance sheet? Obvioulsy it would be a current asset as cash but how would it appear under capital and reserves?

If there is insufficient in the retained profit pot to cover the purchase then they are paying from capital - or can the fact the payment is being made from the proceeds of the life assurance policy get around this? If not, and they can't produce the statement to creditors unders 714 then one assumes the sum assured from the policy will have to satisfy creditor obligations first.

This will mean there is insufficient funds left to buy the shares at the price agreed under the shareholder agreement. 

Does this present a real consideration for this approach? Should one check the level of retained profit / potential creditor exposure before going down this route?

Company share purchase has the advantage that the insurance premiums, although not relievable, are not taxed back on the shareholders as a P11D so is a much cheaper approach. But I am concerned that not all companies are suited for it.

Opinions appreciated

What is really going on...

EOAKS | | Permalink

As is usual 'know all Nichola' based in the heart of Dorset knows more than the investment managers who are now advising on sharebuybacks on almost a daily basis.

This is interesting...read the Winter issue of 'Fund Manager Updates' by St James Place to find out what is really going on.

 http://www.sjp.co.uk/gear/library/documents/Investor68funds.pdf?dsource=...

Peg McGetricks comment page 5

Adrian Frost comment page 3

Jennifer.....a clear and informative article on a difficult subject that accountingweb readers might not meet on a daily basis but one to save for 'if and when'. 

Nichola Ross Martin's picture

Keeping comments in context

Nichola Ross Martin | | Permalink

Thank you EOAKS

Your comment was extremely rude. Although it is quite lost on me why geographical base got anything to do with advising share buy-backs or funds managers for that matter. We advise many small firms on buy-backs and on a personal level I have written detailed guides on the new procedures and tax mechanics of both buy back out of distributable reserves and also out of capital.

In context, 99% of companies in the UK are small and the majority of them are close. I am sure EOAKS, that you appreciate that there is a fine of up to £3,000 if you overlook tax notification in certain circumstances and that a buy-back may be completely unsuitable for a husband and wife company. Larger companies with surplus cash and unwilling shareholders may find buy-backs are great but given that so many companies are small then the comments of investment managers may be rather unworldly, in context.

In response to some of the other points made, then, Yes you could use a buy-back to as a part alternative to ESC C16, but you are only providing an exit for one shareholder at a time*, and then you have to not only pass the connection test, but also the substantial reduction test, and then still manage tax clearance, being extremely mindful of reporting requirements as you go. Lots of boxes to tick! 

Virtual tax support for accountants: www.rossmartin.co.uk

 *(nothing to prevent you from doing this for multiple shareholders but something of a logistical nightmare in terms of clearance procedures,)

Stamp Duty

NewACA | | Permalink

I thought Stamp duty could be avoided via a share buyback, so long as the shares are immediately cancelled.

This is because the substance of a buy back is not so much a share purchase/transfer from one person to another, but rather a reduction in share capital.

Have I got this wrong?

Oh dear.... I hit a nerve!

EOAKS | | Permalink
Tom 7000's picture

shares

Tom 7000 | | Permalink

Very good 10/10 Both Jennifer and Nicola

Tom 7000's picture

shares

Tom 7000 | | Permalink

Very good 10/10 Both Jennifer and Nicola

Share Buy Back

7067vr | | Permalink

I have been involved in a small private company which was in the process of being sold for £50 a share, this fell through so the directors/shareholders have decided to use the substancial cash/undistributed reserves to buy-back shares, can these be valued at the same £50 a share?

Nichola Ross Martin's picture

Valuation issues

Nichola Ross Martin | | Permalink

It is highly unlikely to provoke any comment if you have a recent arm's length MV comparison.

Don't overlook that fact that you need to jump the clearance hurdle and satisfy the trade purpose test. Funding a director's retirement or just deciding to hand back some cash to shareholders may not do that.

Virtual tax support for accountants (and assistance with clearance applications!) www.rossmartin.co.uk 

@NewACA

Exector | | Permalink

You may be interested in Note 4 of this Cos House form:

 

http://www.companieshouse.gov.uk/forms/generalForms/SH03_return_of_purch...

What are the accounting entries

yeboyye | | Permalink

A useful article.  However I am puzzling on the accounting entries.  What are the entries for a private trading company's return of capital that will benefit its trade?  e.g. a shareholder subscribed and paid in full for 150,000 £1 ordinary shares 10 years ago.  The payment is to be £250,000.

Debit Share Capital £150,000 and Debit ??? £100,000

Credit Bank £150,000 Credit Stock £30,000 and Credit Loan from former shareholder £70,000 

Is "???" a debit to Profit and Loss Reserves b/fwd or to another account that will remain in the Capital and Reserves of the Balance Sheet in years to come?

Does VAT need to be charged on the Stock used to part-pay the departing shareholder (who will not be VAT registered in his own right)?

Share Buy Back from a Business Trust

David Cane | | Permalink

I am researching the "end game" for the use of a business trust under S169 TCGA 1992 and company share repurchase. Father settles shares of a trading company in a  business interest in possession trust, with  his child/children as life tenants   working in the trading company and beneficiaries entitled to the capital on his death. In this way IHT is avoided by claiming Business Property Relief. The father and the trustees   elect to claim roll over relief on the gain arising on the shares transferred to the trust. On the death of the father their should be no IHT on the life interest, as BPR will be claimed. At the same time,  the company repurchases the shares from the trust. The trustees obtain clearance from HMRC that this is a capital transaction to treat the repurchase as a chargeable gain and claim entrepreneur's relief. The net cash proceeds are distributed to the child/children. I assume there is no CGT payable by the child/children on the distribution. 

Is this plan workable?

 

COMPANY SHARE BUY BACKS

ONEKOLOTOURE | | Permalink

If there are three shareholders selling and two are non resident , but one is resident, can clearance be obtained for the one UK resident shareholder only?

 

Thanks

 

Marco

class of shares & purpose

npreynolds | | Permalink

Hi Jennifer this is an old entry but I wonder if I could pick your brain? Is the ability to apply cgt rules to proceeds of sale of shares under a buy-back affected if a) the buy back is offered to only some of a class of shareholder ( I imagine"yes" is the answer as it smacks of a scheme ) or b) if only some a class of shareholder accept the buy-back offer ( I imagine this is ok ). And my other question relates to the" benefit of the trade issue" and a company that is registered overseas and uk tax resident. If that company has sold its only uk non cash asset, a property, indeed its only non cash asset in the world then it is hard to see a successful argument that the buy back is for the benefit of the trade. I suppose the we could argue that the trade will now be focussed overseas and run by the overseas shareholders, I worry that HMRC will see the UK trade has ceased but I am not sure if geography is relevant ( I liked you comment above about geography ) - is geography irrelevant in this matter do you think ?                regards                       npr