Company Purchase of Own Shares

The use of the company as a willing buyer for the purchase of its own shares can provide a useful and tax-efficient exit route for its shareholders particularly in the current environment where potential third party purchasers may find it difficult to raise finance.

Ordinarily, the proceeds from a company purchase of own shares would be taxed as a distribution and therefore, for a higher rate taxpayer, this would usually mean an effective tax rate of 25% - this increases to 36.1% from 6 April 2010 for individuals with income of more than £150,000.

However, provided certain conditions are met, it is possible for the shareholder to be taxed under the capital gains tax regime.  What this would mean is that they would suffer a maximum tax charge of 28% and could even have some of the gain taxed at 10% if entrepreneurs’ relief applies.

Irrespective of how the shareholder would be taxed, the company would have to pay stamp duty at a rate of 0.5% on the proceeds of the buy back.

For further information or specific advice on the above please contact Craig Hughes on 0115 983 5595 or 07717 840596 or email chughes@edftax.co.uk.