I am a shareholder in a private limited company and want sell my shares to other shareholders in the business, what is the most tax efficient way to do this?
As a general rule, when a company buys back its own shares (CPOS) from such a shareholder, any ‘premium’ (i.e. payment in excess of the capital originally subscribed for the shares) constitutes a distribution of income, taxable at a maximum rate of 38.1%.
If certain conditions are satisfied the vendor can be treated as receiving a capital payment instead, taxable at a maximum rate of 20%. This sometimes provides individual shareholders with a tax-efficient exit route from the company, particularly if capital gains tax entrepreneurs’ relief is available so that the tax rate is reduced to 10%.
The conditions for capital gains treatment on a CPOS include a ‘trade benefit’ test and various requirements as to the vendor residence, length of ownership of the shares and the extent to which he or she remains connected with the company.
The purchasing company must be an unquoted trading company or the holding company of a trading group. A trading company under the purchase of own shares rules is a company whose business consists ‘wholly or mainly’ of carrying on one or more qualifying trades.
For a CPOS to be valid under company law, the company must normally make full payment on purchase. This requirement can be problematic if the company is suffering cash flow difficulties.
The above points are by no means exhaustive and there is an advance clearance procedure, to seek HMRC’s confirmation that the conditions for capital treatment are satisfied. Therefore, you should take professional advice before taking any action.
The advice in this column is specific to the facts surrounding the questions posed. Neither PKF-FPM nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
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