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  1. Purchase of own shares Storyboard for

  2. …clear thinking

  3. By completing this module you will be able to: Describe why companies buy back their own shares Explain the conditions for the relief to be available Apply to HMRC for a clearance At the end, you can visit useful Internet sites on a “Web Ride” Lecturer: Pete Miller Learning time: approx. 20 min How to use this learning module? - Click on "Help" in the Table of Contents (TOC) Purchase of own shares Graphic: [presenter or standard graphic]

  4. Often used to remove shareholders when others cannot afford to buy them out but company has cash Special rules to allow the payment to be treated as capital, not as an income distribution Reminder: Any amount paid out in respect of share capital, in excess of the amounts originally subscribed, is prima facie a distribution – s1000(1)B(a) Corporation Tax Act 2010 What is it for? Graphic: [a person retiring]

  5. Example: Share buy back to remove a shareholder Pete Viv Pete Viv £££ 50% 50% 100% TradeCo TradeCo Buy back Viv’s shares at MV £500k

  6. Shares must be fully paid up Consideration must be fully paid on purchase, not on a deferred basis Must not be prohibited by Articles of Association Shares can be bought from: Distributable profits A fresh issue of shares for this purpose Out of capital, if distributable profits all used Purchased shares immediately cancelled Various governance requirements too Company Law Requirements – ss690 to 708 Companies Act 2006 Graphic: [CCH book on Companies Act 2006]

  7. Must be unquoted trading company or unquoted holding company of trading group Trading company: business consists wholly or mainly of carrying on trade(s) Holding company: business consists wholly or mainly of holding shares or securities of 75% subsidiaries Trading group: A group (75% subs) the business of whose members consists wholly or mainly of carrying on trade(s) Unquoted: None of the shares are listed on the official list of a stock exchange General Conditions: s1033 CTA 2010 Graphic: [share certificate of a private limited company]

  8. Condition A: Must be to benefit the trade: Not for tax-efficient profit extraction Or to avoid tax OR Condition B: Payment must be to discharge Inheritance Tax liability: Must be paid within 2 years of the death If IHT could not otherwise be paid without undue hardship General Conditions: s1033 CTA 2010 (cont) Graphic: [a funeral hearse]

  9. Seller must be UK resident in the relevant tax year Personal representatives take residence of deceased person Nominee must also be UK resident if shares held through nominee Is this rule compliant with EU law? Residence requirement: s1034 CTA 2010 Graphic: [a union jack flag]

  10. Seller must have owned the shares for at least 5 years Include ownership before reorganisations or reconstructions Include period of ownership by spouse or civil partner prior to transfer to seller Unless no longer living together at date of sale Include period of ownership by previous owner if shares left to seller in will or intestacy Ownership period reduced to 3 years, in this case Period of ownership: ss1035, 1036 CTA 2010 Graphic: [large number 5]

  11. Must reduce interest by at least 25% of the original e.g. from 50% to 37.5% or less Practically, a reduction of 75% is usually preferred by HMRC (see connection requirements) Include interests of seller’s associates Makes POS impossible with husband and wife companies Reduction of interests also looks at rights to dividends, as well as shareholdings Also take into account seller’s (and seller’s associates’) interests in other group companies Reduction of interest requirement: ss1036 et seq. CTA 2010 Graphic: [large 25%]

  12. Spouse and civil partners living together are associates of each other Under 18s and their parents are associates of each other A person connected with a company is associated with the company and any companies it controls, and vice versa If a person is connected to a company and controls another, both companies are associates Further rules for trustees, at s1060, and personal representatives at, s1061 Associates: ss1059 to 1061 CTA 2010 Graphic: [description of graphic]

  13. A person is connected with a company if they have (directly or indirectly) More than 30% of the ordinary share capital or More than 30% of the ordinary share capital plus loan capital or More than 30% of the votes Ignore loan capital by banks, etc., i.e. lenders in ordinary course of business with no management role A person is connected with a company if they are entitled to more than 30% of the assets available to equity holders on a winding up Connected persons: ss1062, 1063 CTA 2010 Graphic: [large 30%]

  14. Seller must not be connected with company or group after transaction Must not be a scheme or arrangements for seller or associates to acquire disqualifying interests i.e. interests that breach the reduction of interests or connection requirements Any transactions within a year are treated as part of such a scheme or arrangements Other requirements: s1042 CTA 2010 Graphic: [a broken chain]

  15. Can apply for clearance from HMRC HMRC will confirm capital treatment or confirm normal income treatment Must apply in writing With all relevant details HMRC must respond within 30 days Note: There is also a post-transaction return requirement (s1046 CTA 2010) Pre-transaction clearances: ss1044, 1045 CTA 2010 Graphic: [traffic light on green]

  16. The key things to remember from this module are: POS is a useful tool for e.g. retirement or ousting of difficult shareholder Pre-transaction clearance is available from HMRC There are a number of company law requirements to be fulfilled, too Summary Graphic: [standard summary graphic]

  17. Web Ride

  18. …clear thinking

  19. Please select the correct answer(s) and then click on “Submit” The residence requirement is that the seller is resident where? In England In Europe In the UK In an EU member State Question 1

  20. Please select the correct answer(s) and then click on “Submit” The seller must reduce his/ her interest by at least 10% 25% 50% 75% Question 2

  21. Please select the correct answer(s) and then click on “Submit” In order to qualify as a capital distribution, what is maximum holding of shares that a 100% owner can hold after a buy-back? 75% 60% 40% 30% Question 3

  22. Now you have finished this module and acquired basic knowledge on Purchase of own shares part one If you answered all the questions in the Quiz correctly, you can print out your personal certificate by clicking on the link Thank you for your attention! Finish Graphic: [standard finish graphic]