Purchase of own shares

How does it work?

A company “purchase of own shares” can be an effective exit planning strategy. This occurs when a company purchases back its own shares from an individual shareholder, who may be retiring from the business, although this may not be necessary in all circumstances. The departing individual’s shareholding is effectively cancelled and entrepreneurs relief may be applied under certain conditions, to achieve beneficial tax treatment.

Using this strategy, individuals can quickly realise the cash value of their shares from funds provided by the company, rather than relying on third parties to acquire the shares.

The benefits

Disposing of your shares using this method has a number of potential benefits –

  • You already know who you are dealing with
  • You don’t need to search out and qualify potential third-party purchasers
  • It will probably be easier to agree the share valuation
  • The sale consideration is provided directly by the company

As your shares are in effect cancelled, the remaining shareholders’ interests in the company will increase, without the need for them to personally inject funds and pay for the shares from taxed income.

Subject to the satisfaction of various conditions, the disposal of shares by the individual will be subject to capital gains tax. In many cases, this will permit the benefit of a maximum tax rate of ten percent on the chargeable gain realised, due to the availability of entrepreneurs relief. In some cases a tax payer may prefer for the proceeds to be taxed as income in which case the buy back can usually be structured to achieve this.

Seeking professional advice

Detailed tax advice should always be taken before contemplating any share transaction.  Taylorcocks has extensive experience in assisting business owners to plan for, implement and manage their exits and successions successfully.  Our shared objective is to achieve the maximum benefit for the departing shareholder, the company and the remaining shareholders.