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Buying out a shareholder on divorce - company purchase of own shares

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Buying out a shareholder on divorce - company purchase of own shares - introduction

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There are many reasons why a company might want to buy back its own shares, among which might be the need to resolve matters on a divorce where one of the parties wants to withdraw from the company and receive cash for their shares.

A company purchase of own shares can be an efficient way of removing a shareholder in these circumstances without the other shareholders having to find the money to buy them out. It also allows the company to restrict the ownership of the shares and ensures that outsiders who might be inexperienced in the business or unsympathetic to the aims of the other shareholders can be excluded.

A payment for a company's purchase of own shares can be treated as an income distribution or, in the case of an unquoted trading company, as a capital payment. Which treatment is the most tax efficient depends on the personal circumstances of the seller.

It must be emphasised that, for capital treatment to apply, the purchase must benefit the company's trade and, generally, the result of the purchase must be the withdrawal of the seller from the company. If the transaction is part of a scheme simply to enjoy profits without receiving a dividend or to avoid tax, HMRC will not apply capital treatment to the payment.

An acrimonious divorce, where both parties are shareholders, is likely to affect adversely the company's trade and HMRC will generally accept that the purchase is for the benefit of the trade provided the effect of the purchase is to remove completely the dissenting shareholder.

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