Tax Issues of Share buyback in the UK
A share buyback is a transaction between existing shareholders and a limited company. A share buyback can be done either through an off-market purchase or a market purchase.
A listed company usually buys its own shares back in the stock market while a private company buys its shares back by agreeing a price with the shareholders. However, a listed company can also choose to operate a share buyback from the intermediary who was instructed to act as principal for the company or to act as its agent in buying back shares from shareholders, on- or off-market.
A private company buys its shares back by agreeing a price with the shareholders who can be the directors or employees, to realise value for their shares. The buyback must firstly be approved by the shareholders and is often covered by the terms included in a shareholders?agreement and passed as an ordinary resolution unless there has any restriction or prohibition in the company’s articles.
If the total consideration exceeds ?,000, stamp duty is payable by the company for purchase of shares. The calculated amount of Stamp Duty is 0.5% of the total consideration and should be rounded up to the nearest multiple of ?.
A share buyback is usually either VAT exempt or outside the scope of VAT but the deductibility of input VAT on costs is subject to the nature of costs associated with the buyback.
A company paid for the buyback is a redistribution of retained earnings and reduction of Share Capital. The associated costs incurred for the buyback are also treated as Capital Expenditure.
Individual shareholders tax issues will depend on their personal circumstances. They may have to pay Capital Gains Tax if they make a profit on selling or dispose of shares. They may benefit from the Business Asset Disposal Relief (BADR) if their situation satisfy with the BADR rules and regulations.
- Share Buyback
Share buyback is a company reacquires its own shares by returning cash to existing shareholders in exchange for a portion of the company’s outstanding shares. Company buy backs are a route for shareholders, who can be the directors or employees, to realise value for their shares.
A share buyback by a limited company can be done either through a market purchase or an off-market purchase. A listed company usually buys its own shares back in the stock market while a private company buys its shares back by agreeing a price with the shareholders. However, a listed company can also choose to operate a share buyback from the intermediary who was instructed to act as principal for the company or to act as its agent in buying back shares from shareholders, on- or off-market.
How the company can buy back its shares is often covered by the terms in a shareholders?agreement. A company buyback must firstly be approved by the shareholders and passed as an ordinary resolution unless there has any restriction or prohibition in the company’s articles.
- Stamp Duty
If the buyback amount (usually called consideration) is ?,000 or less, no stamp duty is payable. However, if the consideration exceeds ?,000, the stamp duty is due at a rate of 0.5% which is to be payable on the Form 169 or 169 (1B).
Stamp duty is to be paid by the company. An intermediary acting as principal in a buy-back structure can claim intermediaries relief from Stamp Duty Reserve Tax (SDRT) on a purchase of listed shares provided it meets the conditions of that relief.
- VAT
The transactions related to the buyback from the shareholders to the company is usually either VAT exempt or outside the scope of VAT.
The services of the intermediary either acts for the company as an agent or a principal will usually be exempt from VAT provided the services fall within the VAT exemption for intermediary financial services.
- Accounting records for a company buying back its shares
The transactions for buy back and associated costs paid out for dealing with the shares will usually be qualified as capital treatment.
(1)
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Chargeable Gain or Loss
The money paid out for buy back the shares will be reported on the Balance Sheet as a redistribution of retained earnings and reduction of Share Capital. The transactions incurred for purchasing its own shares are qualified as capital expenditure, thus, no chargeable gain or loss will be reported as the company’s profit or loss.
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(2)
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Deductibility of Costs
Costs associated with implementing a share buyback, for example professional fees, stamp duty and/or advisory fees, are not usually allowed by Her Majesty’s Revenue and Custom (HMRC) as deductible expenses and pay less corporation tax because they are incurred in respect of the company’s share capital and are therefore capital expenditure.
Borrowing costs on any debt incurred to fund the buyback of shares will usually be deductible. Generally speaking, should not be disallowed by the loan relation-ships for unallowable purpose or regime-wide anti-avoidance rules. Some com-panies may choose to make an application for advance clearance from HMRC that the rules do not apply. The General Anti-Abuse Rule (GAAR) should also be considered when carrying out a share buyback.
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- Tax issues for Individual shareholders
Individual shareholders?tax issues always depend on their personal circumstances. They may have to pay Capital Gains Tax if they make a profit on selling or disposing of shares or they may benefit from the BADR if their situation satisfy with the BADR rules and regulations. A shareholder may find it easier to make a wise decision if pro-fessional advice is sought before selling his right of shares.
(1)
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Capital Gains Tax (CGT)
UK-resident shareholders may be able to use their annual exemption from CGT to cover any gain on the capital element. The capital gains tax allowance in 2022-23 is ?2,300, the same as it was in 2021-22. The tax rates for individual is 10% for a basic rate taxpayer and 20% for a higher or an additional rate taxpayer.
If a basic rate taxpayer sold at a direct (or intermediary as agent) share buyback, his investment return can be offset with his annual exemption from capital gains tax to cover any gain on the capital element. He only needs to pay 10% tax for the return after exemption.
If a higher or an additional rate taxpayer sold a buyback through an intermediary who acts as principal or taking advantage of the unquoted trading company buyback rules, the CGT rate he will be paying is 20%.
Individual shareholders?tax issues always depend on their personal circumstances. However, exempt institutional shareholders will generally be indifferent as to whether the return is from capital or income.
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(2)
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Business Asset Disposal Relief (BADR)
From March 2020, Entrepreneurs?Relief (ER) has been renamed to Business Assets Disposal Relief (BADR) which maximum lifetime gain relief was reduced from ?0 million to ? million on which will be taxed at 10%. However, to qualify BADR, investors who intend to give up their shares must satisfy with the rules and regulations set by HMRC.
Basic requirement is the individual needs to have held the qualifying shares for at least 5 years and has been employed or a director in the company, or the holding company of a trading group for at least two years before the buy back. In his capacity as shareholder, he must have held for 2 years, 5% or more of nominal issued share capital and 5% of voting share capital.
There is no requirement as to hours or salary but there should be some evidence of working in the business; Non-executive directors and company secretaries count as officers; A written employment contract is indicative of employment and will assist if there is an HMRC challenge.
Furthermore, the investor cannot have any preference arrangements with the business. The shares he has hold must be newly issued shares which means that transfers of shares from existing owners will not be qualified. The shares must have been issued on or after 6 April 2016 and have been held for three years before disposal. |
See also:
Share Buyback in the UK
UK Company Share Transfer Procedures and Fees
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