8 Mins
As mentioned in our recent newsletters, the first budget of the new Labour government is due on 30 October. There have been a number of warnings that this will be a painful budget and the government will have to make some ‘big asks’ of the public.
In the last two months, we have been working with many clients to implement planning they have been considering. For those who have started planning, they can begin putting their plans in place under the rates and allowances already considered. For those looking to start planning now, it is important to note that there may not be enough time to fully plan and execute prior to the budget however please feel free to get in touch if you are concerned and would like to discuss.
Much of the planning we have seen recently has focused on capital gains tax, including family investment companies, company share buy backs and sales of both property and other assets.
Capital Gains Tax
As mentioned previously, Capital Gains Tax (CGT) is the area that most expect there to be real change. This has been strengthened by Rachel Reeves’s announcement this week that Labour will not raise tax on pension contributions which leaves CGT as a leading candidate for changes.
There have been very few leaks to date regarding the changes to CGT the government could make. Could we see an amendment to current CGT allowances/reliefs such as reducing the £3,000 annual exemption, changing Business Asset Disposal Relief or gift relief? We could see an increase in the CGT rates, possibly raising levels in line with income tax! Any of these changes would likely increase the CGT payable. While there may be further hints as we approach the budget, it will likely not be until the detailed documents are released shortly after the Chancellor finishes speaking until we really know what the changes will be and how this will affect future transactions.
Company Purchase of Own Shares
A company purchase of own shares, or a share buyback, is a common strategy used for various business reasons. However, there are a number of tax implications to be aware of for both the company and shareholders involved.
What is a Share Buyback?
A share buyback occurs when a company repurchases its own shares from existing shareholders, reducing the number of outstanding shares in circulation. This process can benefit the company by consolidating ownership, enhancing earnings per share, and offering a tax-efficient way to return excess capital to shareholders.
Tax Implications for Shareholders
When a company buys back its shares, the payment received by shareholders can be treated as either a capital gain or as a distribution (income), depending on how the transaction is structured.
Income Treatment
Payments by companies in respect of share buy backs from individuals are usually treated as income distributions. In this case the proceeds are taxed as dividend income. This is generally less favourable for higher-rate taxpayers because dividend tax rates are usually higher than CGT rates.
The dividend will be the amount received less the original subscription price.
If the seller was not the original shareholder there may also be a capital gains tax liability.
For the 2024/25 tax year, dividend income is taxed as follows:
- Basic-rate taxpayers: 8.75%
- Higher-rate taxpayers: 33.75%
- Additional-rate taxpayers: 39.35%
However, the first £500 of dividend income is tax-free due to the dividend allowance. After this allowance, the relevant tax rates apply.
Capital Treatment
If certain conditions are met the buyback will not be treated as an income distribution. Instead, the shareholder will receive a capital sum on disposal equal to the amount paid by the company which will give rise to capital gains tax, based on proceeds received less the shareholder’s base cost.
This gain will be taxed at either 10% or 20% depending on whether the individual is a basic or higher rate taxpayer.
Business Asset Disposal Relief (BADR) may be applicable if the shareholder meets the required conditions.
For the capital treatment to apply the company must be an unquoted trading company that is not a 51% subsidiary of a quoted company.
The repurchase must satisfy all the following conditions:
- it must wholly or mainly benefit the trade carried on by the company (or a 75% subsidiary) and not be part of a scheme for which the main purpose is the avoidance of tax, and:
- the vendor must be resident in the UK at the time of the purchase,
- the vendor must have owned the shares for at least five years (this is reduced to three years if acquired as a result of a death, and the ownership period of the deceased is included) – holding periods of a spouse or civil partner can be amalgamated,
- there must be a substantial reduction in the vendor’s shareholding (i.e. they must hold not more than 75% of their prior interest after the buy-back); and
- following the buy-back, the vendor must not be connected with the company – here meaning owning more than 30% of the shares.
Tax Implications for the Company
From the company’s perspective, the primary tax concern is whether the share buyback is funded from capital or distributable profits. Generally, companies use distributable profits to fund buybacks, which are subject to specific legal and tax requirements.
1. Corporation Tax
A share buyback does not attract corporation tax. However, if a premium is paid over the nominal value of the shares, the premium is considered a capital distribution which could have additional tax implications.
2. Stamp Duty
A company must pay stamp duty on the repurchase of its own shares. The rate is 0.5% of the total consideration paid, rounded up to the nearest £5. This applies to both market and off-market transactions.
Legal and Regulatory Considerations
While tax is a crucial aspect, companies must also ensure compliance with the legal framework under the Companies Act 2006. Key considerations include:
- Ensuring the buyback is for the benefit of the company’s trade.
- Filing necessary documents with Companies House and adhering to the appropriate buyback procedures.
Multiple Completion Contract
Typically, a company must have sufficient distributable reserves to carry out the buyback. If the company does not have the required funds, it is possible to structure the buyback as a multiple completion contract.
A multiple completion buyback is a sale of shares by way of a single unconditional contract, under which the seller disposes of their entire beneficial interest at the date of the contract and the company completes the buyback on a series of successive dates. This can allow for the shareholder to obtain capital treatment on the buyback while spreading the cash cost of the purchase for the company.
Despite the payment being made in tranches, the seller will still be subject to capital gains tax on the total consideration (including the deferred elements) in the year in which the contract is signed. The seller will have to ensure they have funds to settle the tax liability on both the initial consideration and the deferred elements.
HMRC’s view on deferred consideration has tightened, particularly around the connection test for the existing shareholder, and they may refuse clearances where the seller retains legal ownership of more than 30% of the company’s ordinary shares after the contract is completed.
As for companies, they will pay the relevant consideration at each separate completion date, cancel the relevant tranche of shares being purchased, and submit form SH03 from to the Registrar of Companies. 0.5% stamp duty will be payable on each tranche being bought.
In conclusion, company share buybacks offer a flexible method for returning value to shareholders, but the tax implications are intricate and require careful planning.
Given the complexity involved, we would recommend that you get in touch before proceeding with a share buyback so that we can assist with ensuring that the transaction is completed in the most tax-efficient manner that aligns with strategic goals.
2024 Paper Tax Return Submission
This is a gentle reminder for those opting to file your tax returns by paper.
Please remember that the returns must reach HMRC by 31 October. If your return is not received by this deadline, you will be required to file electronically to avoid a £100 late filing penalty.
Collecting tax through PAYE
As with the deadline for submission of paper tax returns, please also note for those who have a tax liability below £3,000 and want HMRC to collect the tax through your PAYE coding, you must submit paper returns by 31 October or electronic returns by 30 December, if you haven’t done so already, get your tax return information as soon as possible!