Restructuring: Have You Considered How To Exit Your Business If You Don’t Have A Buyer?
When thinking of the future of your business, and your possible exit or retirement, it is important to plan ahead. This can help ensure that your exit is structured in such a way to put you in the best position both commercially and from a tax perspective.
There are various options that can be explored when planning a shareholder’s exit, including selling the shares to the remaining shareholders, selling to an unconnected third-party or various forms of employee ownership. However, there may be circumstances where these scenarios are not viable options, and a company buyback of shares may be the preferred route.
This involves the company purchasing the shares from the company through its existing retained reserves and cash. If certain conditions are met, the payment for the shares will be treated as a capital distribution, subject to Capital Gains Tax (CGT), rather being than being treated as dividends subject to income tax. Given the current gap between the income tax rates (up to 38.1% for dividends) and capital gains tax rates (as low as 10% if certain CGT reliefs apply), it is important that the purchase of own share legislation is fully understood.
To ensure that the transaction doesn’t fall foul of any of the qualifying conditions it is therefore important to obtain professional advice and undertake advance planning.
There are also a number of other factors that need to be considered when looking at a company buy back of shares, such as:
- Any restrictions in the company’s articles of association.
- How the buyback will be financed.
- Other tax considerations such as stamp duty and inheritance tax.
- Reporting obligations to Companies House and HMRC.
- Whether advance clearance should be sought from HMRC to gain certainty over the tax treatment.
Getting the right professional advice when going down this route is therefore highly important.
We have recently completed some work for one of our clients who had a shareholder who wanted to exit from the business. There was no one in a position at the time to purchase the shares and it was not in the company’s best interests for the shares to be sold to an unconnected third party. The solution in this particular case was a share buyback, which allowed the shareholder to exit from the business and allowed the remaining directors/shareholders to retain the business and drive it forward.
In deciding which route is best for you our EQ Taxperts will work with you to ensure that your exit is structured in a way that meets your requirements and is undertaken as tax efficiently as possible.
You can read our previous article on ‘Would You Benefit From Incorporating Your Business?’ here.
If you would like more information, or want to discuss your retirement plans for your business, please get in touch with our Transaction Taxperts today via [email protected] or call one of our offices.