Client company obtained investment from outside investors under EIS/SEIS, totalling £200K. Over 3 years later and the client has asked whether the company can borrow funds (loan) to buy back the shares from the investors. I have advised that this won't work, as a buyback has to be from distributable reserves.
Client cannot afford the purchase personally.
Shares have paid dividends over the past 3 years, albeit fairly low amounts.
I don't think this can be done? Am I missing something? Can an associated company buy the shares?
Company makes a small profit.
Thanks
Replies (6)
Please login or register to join the discussion.
Ignoring the reserves issue a purchase of own shares will not get capital treatment until the shares have been owned for at least 5 years.
For both reasons the best option is likely to be to put a holding company in place buying out the EIS/SEIS investors in the process.
Presumably the EIS investors will now want to be paid market value for the shares, rather than simply the amount that they originally subscribed (assuming that market value is higher). The excess will still be taxed as a distribution, unless capital treatment applies.
One imagines that the reserves issue would not arise, unless it was intended to purchase the shares for more than the amount originally subscribed.
I agree on point one - I was assuming that, like many EIS companies that I have seen, the value of the shares hasn't actually moved much. But of course if the value has increased then the excess would be taxed as an income distribution.