Share buyback rules for private companies

The government recently announced a review of the share buyback rules, intended to identify whether the rules are being abused by companies to inflate company value, thus justifying increased executive pay. For more information, see here.

For unquoted companies, buybacks – ie the purchase of own shares by a company – can result in the vendor being subject to capital gains tax for the vendor, rather than being treated as receiving a dividend and taxed at a higher rate. However, to achieve this, certain conditions must be met – including the requirement for a UK resident vendor to sell at least 75% of their shareholding in the company, which must have been held for five years.

These share buyback rules can be prescriptive for private companies to secure capital gains tax treatment for sellers, and with increased scrutiny from the government, companies might think about establishing an Employee Benefit Trust (EBT) instead to facilitate a purchase of shares in the company.

Advice should be taken regarding Employee Benefit Trusts, particularly in relation to the tax valuation of the shares in an unquoted company, but a disposal to an Employee Benefit Trust should qualify for capital gains tax relief and there would be no requirement to pay for the shares from the company’s distributable reserves.

The RM2 Partnership can advise on the establishment of Employee Benefit Trusts in relation to share acquisitions, usually in the context of a government recognised tax advantaged employee share plan, including using them to warehouse shares for employee incentivisation. We also act as trustee for many Employee Benefit Trusts administered on behalf of our clients.