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Share buy-back alternatives

18 March 2010

It has long been possible for a private company to buy back its shares from a shareholder. Provided this is properly structured any gain arising on the shareholder is taxed as a capital gain.

However, it is not always possible to satisfy all the requirements for a share buy-back, whether from a company law or tax law perspective. An alternative structure is a court approved reduction of capital.  However, this is a time consuming and costly process.

The Companies Act 2006 introduced a new, simplified procedure for companies wishing to reduce their share capital. A company can now reduce its share capital through a solvency statement signed by the directors, and the passing of a special resolution by the members.

The reserve arising from the reduction of capital is distributable. An incidental benefit is that there is no stamp duty on such a reduction, unlike on a company purchase of its own shares.

The new procedure may well be a useful tool in a number of circumstances. For example, a company wishing to return some of its share capital but which has no distributable profits can use this procedure to return share capital to shareholders. Provided the shareholders subscribed for the original amount there will be no tax arising on the repayment.

Looking ahead to the change in income tax rates, from 40% to 50%, there may be circumstances where shareholders would prefer to receive dividends taxable at the higher rate of 36%, where the company does not have distributable profits but may have unrealised profits.

Redeeming the company’s share capital and paying the resulting dividend out could give rise to a significant tax saving. Clearly, much will depend on individual circumstances.

Finally, it is worth bearing in mind that any such proposal is a ‘transaction in securities’ and that HM Revenue & Customs clearance will be required.

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