Share this content

Tax re purchase of shares

What, if any are the tax consequences of shareholders buying out a 3rd existing shareholder?

Didn't find your answer?

I am working with a small company, where 2 shareholders are looking to buy all existing shares of a 3rd and for that person to fully exit all involvement with the business. Due to cash considerations, it is likely to be a deferred purchase, and I wonder if anyone has any guidance they could offer regarding the tax conseuqences of this transaction for either the company (if it were to purchase its own shares) or for the two remaining shareholders if they bought them. I can see that any share purchase agreement that might be used or negotiated, could create a future tax consequence for them, in any future similar sale they entered into, to leave the business themselves, but am less clear what, if any, the consequences of this present planned transaction might be for them or their company. All thoughts gratefully welcomed!

Replies (8)

Please login or register to join the discussion.

avatar
By David Ex
19th Oct 2021 10:13

ASF wrote:

I can see that any share purchase agreement that might be used or negotiated, could create a future tax consequence for them, in any future similar sale they entered into, to leave the business themselves, but am less clear what, if any, the consequences of this present planned transaction might be for them or their company.

If the amounts are not trivial, I’d pass it to someone with the relevant experience and knowledge.

Thanks (0)
Replying to David Ex:
avatar
By paul.benny
19th Oct 2021 10:58

+1

You also need to be clear about who you are acting for. I don't see any conflict in acting for company and remaining shareholders/directors. But their interests and those of outgoing party are not the same.

Depending on the sums involved, I'd also recommend a proper agreement that addresses possible obligations on outgoing party (eg personal guarantees, company pursuing outgoing for liabilities). And potentially including a working capital value to deal with possibility of outgoing emptying bank account. And potentially a restraint of trade, protection of knowledge, etc.

Thanks (1)
Replying to paul.benny:
avatar
By David Ex
19th Oct 2021 10:59

paul.benny wrote:

You also need to be clear about who you are acting for.

Good point. Thought crossed my mind after I’d posted.

Thanks (0)
avatar
By ASF
19th Oct 2021 12:47

Thanks for feedback so far. I am in no way supporting the outgoing shareholder, who, at this point has relatively little (but not zero) involvement with the daily activity of the company. I have also made it clear to the two "active" shareholders that I believe they will need to take external advice (legal and tax). They do have a Shareholders' Agreement, which (superficially) deals with the sale process, but it may well need to be supplemented by a specific one for the particular circumstances being negotiated in this case. All I was really trying to do, was some "background" research around the topic, for my own benefit, so that I better understand where some of the "pinch points" might be. Thanks again.

Thanks (0)
avatar
By bernard michael
20th Oct 2021 09:52

I assume the company has adequate reserves if it were to buy back its' shares

Thanks (0)
avatar
By ASF
20th Oct 2021 16:20

Last time I looked yes, but it is clearly something that would be confirmed prior to considering any share purchase by the Company. As mentioned, the greatest constraint would be the cash balances, which would dictate some form of deferred purchase arrangement with the seller.

Thanks (0)
Replying to ASF:
Psycho
By Wilson Philips
20th Oct 2021 23:08

If you’re looking at a deferred purchase then you may have to tread carefully if you’re looking for maximum tax efficiency.

Thanks (0)
Replying to Wilson Philips:
avatar
By ASF
21st Oct 2021 09:46

Absolutely, but I would expect the consequences would be greater for the seller (as in IT vs CGT), than for the buyer (only SDRT as far as I can see). Was there anything else, in particular that you were thinking about when you made the observation? Clearly, if, at some future time the remaining shareholders then sought to become sellers, the seller's tax considerations would come into play for them if no later share sale/purchase agreement were negotiated at that point. All that said, as I mentioned, I have been very clear to the "buyers" about their need to take necessary tax and legal advice before going too far down the path.

Thanks (0)
Share this content