Passing on a company - company purchase of own shares - introduction
There are many reasons why a company might want to buy back its own shares, among which might be the desire to control who owns the company's shares after the older generation retires from the business.
A company purchase of own shares can be an efficient way of buying out a shareholder who is withdrawing from a family company, leaving it to the next generation to continue the business. It 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. It also enables the retiring shareholder to receive cash for their shares without the other shareholders having to find the money themselves.
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.
The withdrawal from the company of a person who wishes to retire and who no longer has the interest or energy to act in the best interests of the company is likely to benefit the company's trade.
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