Tax-efficient share buybacks
HMRC has issued new guidance to companies where they purchase their own shares. It includes useful tax-saving advice for married couples who both own shares in the same company. What’s the full story?
There are many reasons why you might wish to sell your shares in a business, for example, you might want to retire or move on to pastures new. Whatever your reason, if the other shareholders don’t want to purchase your shares, say because they can’t afford to pay you what they’re worth, your company can buy them from you instead. But there’s a catch.
Where a company purchases shares in itself, the sum paid to you is treated for tax purposes as if you had received a dividend. You might, therefore, have to pay as much as 30.55% income tax on the amount.
Tip. Your company can ask HMRC for the payment to be treated as capital rather than income. If you and the company meet HMRC’s conditions, it means that the money you receive will instead be liable to capital gains tax (CGT), potentially at rates as low as 10%.
Until now HMRC’s guidance on the tax treatment of a share buyback has been difficult to follow. However, its latest guide, published in August 2014, is much clearer. Importantly, it acknowledges that a tax-saving strategy, which in the past has been a sticking point for those wanting capital treatment, is now acceptable.
HMRC won’t agree to capital treatment unless the shareholder has owned their shares for at least five years. This condition prevented a married shareholder reducing their overall tax bill by giving some of their shares to their spouse shortly before a buyback in order to make use of their CGT annual exemption. HMRC’s new guidance confirms that it’s now possible because the spouse receiving the shares takes on the ownership period of the other spouse.
Example. John has owned 200 shares in Acom Ltd since 2008. He paid a total of £200 for them. They are now worth £200,000. John wants to retire in July 2015. The other shareholders can’t afford to buy John out, but Acom can. In September 2014 John transfers eleven shares to his wife, Ann. She is treated as having owned the shares from the date John bought them, i.e. 2008. As planned, Acom buys John’s and Ann’s shares in 2015. HMRC agrees capital treatment for all the shares because the five-year ownership (and other conditions) are met. Ann’s capital gain is £10,989 which is covered by her CGT annual exemption meaning she has no tax to pay.
Assuming John pays CGT at 10% on his shares, then by transferring eleven of them to Ann a tax saving of £1,098 is made (£10,989 x 10%). Unless Ann pays CGT at the same or lower rate than John, he should avoid giving her more shares than are needed to use her annual CGT exemption as it will result in her paying more tax than John would have had he kept the shares.
The new guidance confirms that where one spouse transfers shares to another the transferee is treated as having owned them for the same time as the transferor. That allows one spouse to shift shares to their partner to make use of their capital gains tax exemption shortly before the company purchases them.
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