Buy Back Process
Guidance on Share Buyback in a UK Private Company
A share buyback occurs when a company purchases its own shares from shareholders. This can be an effective way to return value to shareholders, restructure ownership, or remove retiring shareholders. However, there are specific legal and tax implications to consider.
Key Considerations for Share Buybacks
1. Legal Framework
• Governed by the Companies Act 2006, particularly Sections 684-723.
• A company can only buy back shares if:
• It has **sufficient distributable reserves** or is financed through a permissible route (e.g. fresh issue of shares).
• The buyback is approved by shareholders via an ordinary resolution.
• The articles of association permit it (if not, they may need to be amended).
2. Financing the BuybackA private company can finance a buyback from:
• **Distributable profits: Profits available for distribution as dividends.**
• Fresh issue of shares: New shares issued to raise capital for the buyback.
• Capital redemption reserve: If shares are bought back using capital.
3. Shareholder Approval
• A special resolution (if using capital) or an ordinary resolution (if using profits) must be passed by shareholders.
• The shareholder selling their shares cannot vote on the resolution.
4. Procedural StepsThe process involves the following steps:
| Step | Document Required | Action Required |
|---|---|---|
| Board Approval | Board Resolution | Directors approve the buyback |
| Shareholder Approval | Shareholders’ Resolution | Obtain required shareholder approval |
| Contract Agreement | Share Purchase Agreement | Execute an agreement for the buyback |
| Payment Processing | Payment Records | Pay the selling shareholders |
| Statutory Filing | Form SH03 | File with Companies House within 28 days |
| Capital Reduction (if applicable) | Form SH06 | File if capital is reduced |
| Update Share Register | Share Register | Amend register to reflect buyback |
| Stamp Duty (if required) | HMRC Submission | Pay stamp duty if applicable |
5. Tax Implications
• For the Company:
• The buyback payment is usually made from post-corporation tax profits, making it the same as methods like dividends.
• No tax relief is available for the company on the buyback cost.
• For the Shareholder:
• The amount received is usually taxed as a capital gain, subject to Capital Gains Tax (CGT).
• If the buyback is treated as an income distribution, it may be subject to Income Tax instead of CGT. This is if HMRC thinks shenanigins are afoot.
• Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) may apply if specific conditions are met. Basically own 5% or more and owner for a significant time.
6. Conditions for Capital Treatment (Favourable Tax Treatment)To qualify for capital treatment rather than income tax:
• The buyback must be for the benefit of the trade.
• The shareholder must reduce their interest in the company.
• The shareholder must have owned the shares for at least 5 years.
• The company must remain unquoted after the buyback.Pros and Cons of Share Buyback vs. Alternative Methods
| Criteria | Share Buyback | Termination Payment & Gift |
|---|---|---|
| Cost to the Company | Higher (post-CT profits used) | Lower (deductible as an expense) |
| Tax Efficiency | Potential CGT treatment (if conditions met) | PAYE/NIC impact for termination payment |
| Complexity | Legal formalities with Companies House | Simpler but potential CGT for shareholders |
| Shareholder Impact | Immediate exit from shareholding | Potential liability for Capital Gains Tax |
Steps to Implement a Share Buyback
- Board Meeting
• Convene a meeting to approve the buyback in principle and draft resolutions.
- Shareholder Resolution
• Pass an ordinary or special resolution, depending on funding source.
- Drafting Buyback Agreement
• Outline terms, including number of shares, price per share, and payment method.
- Filing with Companies House
• File Form SH03 (Return of Buyback)
• File Form SH06 (Reduction of Capital), if needed.
- Update Company Records
• Update the share register and confirm changes in the next annual confirmation statement.
- Tax Considerations
• Ensure compliance with CGT rules for shareholders and calculate any PAYE obligations if applicable.
Conclusion
A share buyback is a viable way to facilitate the retirement of directors while ensuring fair compensation. However, it may result in higher tax costs for the company. Exploring alternative options, such as termination payments followed by gifting the shares, could be more tax-efficient depending on the circumstances.