Chartered Accountants & Registered Auditors
+44 (0) 28 90325050 |
www.muldoon-accountants.co.uk Withdrawing from the company tax efficiently
a company purchase of own shares (also known as a share buyback) from a shareholder can result in monies being extracted from a company and the shareholder availing of the lower 10 per cent Entrepreneur’s relief versus dividend tax at the marginal rate of 38.1 per cent. this is very valuable to a shareholder, resulting in increased funds in the hands of the individual who is retiring, or who is looking to withdraw from the business completely, or where there is a death of the shareholder.
In many cases, a share buyback may be the only way that shareholders can get the value from their investment as there may be no willing external purchasers for the shares, or perhaps it is a family company and the family want to keep the shares within family ownership but cannot afford to buy the shares back from the shareholder themselves.
depending on the circumstances
there are two possible tax treatments of the share disposal by the individual: the income treatment with a marginal tax rate of 38.1 per cent or the capital treatment at a rate of 10 per cent. there are various conditions that need to be met in order to achieve the favourable capital gain treatment which are outside the scope of this article.
from the company’s perspective, hMrc will not consider the costs of implementing a share buyback as tax deductible. any legal or tax advice fees etc connected with the share buyback will therefore be disallowable. however, the interest charged on a loan (if applicable) obtained by the company to fund the buyback should be tax deductible as long as there is no attempt to structure the arrangements so as to obtain a tax advantage and the loan is at arm’s length.
the funding of the share buyback via
the company means the funds raised and monies used to service the debt are within the company and no income tax implications arise for the remaining shareholder(s). Increased income tax liabilities can arise if the remaining shareholder(s) raise funds personally to purchase the shares of the departing shareholder in their personal names.
More often than not, the monies used to service the debt will come from the company and, as monies have been extracted from the company for personal use, these will need repaid generally via increased dividends, resulting in resulted income tax liabilities if the buyback is not structured correctly.
It is advised that careful planning should be implemented to ensure the share buyback is as tax efficient as possible.
If there is anything in this article that affects you or somebody you know please speak to Steven McVitty for independent professional advice.
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