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Consideration amount used for a share buy back

Company Share Buy Back - Stamp duty ? and accounting treatment?

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I have a close company share buy back to prepare - I will be using Inform Direct for the paperwork requirements -I do have a couple of questions if I may, if anyone can assist?  I completed one of these a while back, but they qualified as a capital distubition, so I am just checking on the rules required as this buy back will be a distribution from profits.  

4 Share holders  - 1 Ordinary Share (Daughter 75%), 1 Ord A Share (Husband 8.33%), 1 Ord B Share (8.33% Parent 1) , 1 Ord C share (8.33% Parent 2)

2 shareholders are retiring - each parent owning 8.33% each. (Shareholders are not employee's or directors)

Ord B - Share holder - Owned 4 years and Ord C Share holder 3 years - Each receiving (consideration) of £25,000 for the buy back of shares. 

They do not qualify for a capital distrubtions (so no capital gains tax relief available) as both S/H's did not owe the shares for the period of 5 years. Therefore I was thinking as the proceeds from the shares will be from distibution of profits (i.e a dividend) and not from a capital distribution.  Can I show the buy back of shares at the nominal value of £1.00 per share ? Therefore the consideration being less than £1,000... and no stamp duty required and no stamping required by HMRC? 

The remaining £24,999can then be shown as distrubtion through a dividend. This would then keep the accounting very straight forward.

If, this is not possible, please could anyone help with the accounting journals required - There is only 12 shares in Issue  - £12.00 in share capital. No share premium. There is plenty of profit available for distribution. 

Thank you in advance.

 

Replies (17)

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By Matrix
26th May 2020 14:20

Don’t you need to separate out the accounting and the tax? So the share buy back is accounted for as a share buy back and you book the journals accordingly. Separately this is taxable as a distribution but that does not mean it is accounted for as a dividend.

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Replying to Matrix:
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By Joane Rowland
26th May 2020 15:07

Yes, accounting and tax two different questions really, quite a lot in this question really.

My first Point that I needed clarification on - Was how to position the sale - What is the consideration paid for the share buy back ?

Can the company buy back the shares at the nominal value of the shares? which would in turn result in no stamp duty?

If this is the case I was thinking I could first declare a dividend for the £24,999? to account for the full £25,000 they want to receive.

I was only thinking of a dividend before sale if the consideration was at nominal value and even if this could be done or even allowed?

I seem to be stuck on this and can't get my head around it all!

Unless if I go for the sale being consideration of £25,000 what would the accounting entries be in these instance.

Tax treatment would be for the company £250.00 (0.5% of £50,000).
Seller - Distribution - taxed as dividend income ? Is that correct

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Replying to Joane Rowland:
Psycho
By Wilson Philips
26th May 2020 15:44

The company can pay what it wants, so yes a sale for NV preceded by a dividend.

But:

How are you going to deal with the dividend to certain shareholders only? (Need to consider waiver implications)

Sale of shares at undervalue - potential IHT issues.

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Replying to Wilson Philips:
By johngroganjga
26th May 2020 15:49

Wilson Philips wrote:

How are you going to deal with the dividend to certain shareholders only? (Need to consider waiver implications)

Presumably the alphabet share structure permits that.

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Replying to johngroganjga:
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By Joane Rowland
26th May 2020 17:19

Yes, that is correct , the different classes allow different dividends to be declared, so no problem there!

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Replying to johngroganjga:
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By Joane Rowland
26th May 2020 17:19

Yes, that is correct , the different classes allow different dividends to be declared, so no problem there!

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Replying to Joane Rowland:
Psycho
By Wilson Philips
26th May 2020 18:16

I wouldn’t be so quick in assuming there’s no problem. There might not be, but you might need to consider HMRC’s views on alphabet shares.

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Replying to Wilson Philips:
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By Tax Dragon
26th May 2020 22:15

Wilson Philips wrote:

I wouldn’t be so quick in assuming there’s no problem. There might not be, but you might need to consider HMRC’s views on alphabet shares.

A matter that I'm pretty sure is the express subject of a recent thread in here.

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Replying to Wilson Philips:
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By Matrix
26th May 2020 17:55

Wilson Philips wrote:

The company can pay what it wants, so yes a sale for NV preceded by a dividend.

.


Not really. The company should pay what has been agreed for the shares. See the opening sentence, it is a share buy back and not a dividend.
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Replying to Matrix:
Psycho
By Wilson Philips
26th May 2020 18:11

Depends on timing. If the consideration hasn’t yet been agreed, then the parties can agree on whatever number they want.

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Replying to Wilson Philips:
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By Tax Dragon
26th May 2020 22:19

Wilson Philips wrote:

Depends on timing. If the consideration hasn’t yet been agreed, then the parties can agree on whatever number they want.

They can. I'm no expert on any of the various stamp duties, and the anti-avoidance rules related thereto, so I have no idea about John's point below. But as you've pointed out, playing around brings in other issues.

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Replying to Joane Rowland:
By johngroganjga
26th May 2020 15:47

As the first response says, this is a share purchase regardless of the tax consequences. You want to dress it up as something it isn’t in order to avoid stamp duty. Think about that for a moment.

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Replying to johngroganjga:
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By Joane Rowland
26th May 2020 17:04

Sometimes talking aloud helps find the answer.

So ok...Yes, this indeed a company share buyback for £25,000 to each shareholder - There is no need to do this another way, the stamp duty is nominal.

So 2 points left to cover now.

Accounting treatment - Can someone point me in the right direction of the Company accounting journals required for this transaction?

Debit Bank £50,000
Credit - Capital Reserves 50,000

Debit - Capital Reserves £50,000
Debit - Share Capital £2.00
Credit - retained profit 49,998

2. How is this distribution shown on the seller's tax return as this does not qualify as a capital distribution? Can they pay dividend rate for this distribution?

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Replying to Joane Rowland:
By johngroganjga
26th May 2020 18:07

Some of your entries are back to front.

Bank is a credit, not a debit.

The debits are £2 to share capital and £49,998 to retained profits.

Finally, there is a transfer of £2 from retained profits to capital redemption reserve.

Yes it’s taxed at the income tax rates applicable to dividends.

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Replying to Joane Rowland:
Psycho
By Wilson Philips
26th May 2020 18:14

Stamp Duty of £250 certainly isn’t very much. I’m not sure that I’d describe it as nominal.

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By Dib
26th May 2020 16:12

Just a query if you don't mind. Have you considered whether s1035(3) CTA 2010 may apply to increase the length of ownership or did the parents literally acquire their shares from scratch 4 and 3 years ago?

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Replying to Dib:
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By Joane Rowland
26th May 2020 17:17

Yes, I am pretty sure they still do not qualify, as Parent 1 shares were from incorporation 4 years ago. There was then a share split and the husband took a share from the wife a year later.

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