Business Growth, Limited Company

How does a company buy back its shares

Posted on by Sharon Baker
30
May

Buying Back Shares: How it works, and why you need a joined up approach from the experts

When a limited company wants to buy back its own shares, known as a purchase of own shares, it’s often a strategic decision that can tidy up a shareholder structure, resolve a dispute, or allow a shareholder to exit the business.

But behind the scenes, the process is far from simple.

At first glance, it may look like a straightforward transaction. But trust me, this is one area where having your accountant and solicitor on the same page is not just helpful… it’s essential!

Why Would a Company Buy Back Its Own Shares?

There are several reasons a company might consider buying back existing shares from its shareholders:

  • A shareholder wants to retire or exit the business
  • There’s a dispute between shareholders
  • Shares were originally issued to incentivise an employee who’s now leaving

While the goals might be clear, the path to achieving them is anything but.

This is where careful planning and consideration comes in, and where your accountant and solicitor need to work together, to provide you with our expert guidance.

It’s key to understand what you’re trying to achieve, and why, and making sure that the guidance we provide is legal, tax efficient, and easy to understand.

How It Works In Principle

A company can only buy back its own shares under certain conditions set out in the Companies Act 2006.

When the shares are bought back from you as shareholder, the company pays you the cash, and your shares are usually voided.

This can be a better solution than selling shares to another shareholder in the same company, as the cash is coming out of the company bank account, and not from another shareholder, who may not have the cash available.

Key elements include:

  • Ensuring the company has sufficient cash and profits to fund the buy back
  • Obtaining a professional valuation for the shares being purchased
  • Drafting a suitable share purchase agreement
  • Getting shareholder approval via a special resolution
  • Completing the relevant Companies House filings and issuing a statement of capital

That’s the simplified version, but as with all things legal and tax-related, the devil is in the detail, and it’s not something we would recommend you attempting yourself.

Getting HMRC Clearance, It’s Not Optional

IF you’re selling your shares back to your company, and want the sale proceeds to be treated as capital, and benefit from Capital Gains Tax (CGT) rates or even Business Asset Disposal Relief (BADR), then HMRC clearance is vital.

Without HMRC Clearance, the funds you receive from selling your shares would be treated as dividend income, which could be taxed at higher income tax rates.

This advance clearance gives peace of mind that HMRC will treat the transaction as a capital disposal, and taxed under CGT rules, provided certain conditions are met.

Applying for clearance involves:

  • Writing to HMRC with a full breakdown of the transaction
  • Providing detailed financial information and rationale for the proposed buyback
  • Making sure all statutory conditions are satisfied, especially around genuine commercial reasons and shareholder relationship changes

But here’s the catch: clearance is not guaranteed. A poorly drafted submission, missing paperwork, or weak justification can all derail the process, and result in a nasty tax bill.

Why You Need Professional Advice

This is where our role as your accountant and advisor really matters. We help you:

  • Discussing your requirements with you, and understanding the outcome you desire
  • Making sure that what you want to achieve is legal and tax efficient, and that all shareholders are happy
  • Most importantly, making sure that you understand what’s happening, and have chance to answer questions
  • Confirm your company has the reserves (cash and profits) and structure to support a buyback
  • Draft a clearance application that covers all the technical angles, and anticipates HMRC’s questions
  • Liaise with HMRC and yourselves throughout the process
  • Coordinate with your solicitor on timing, legal agreements, and compliance filings
  • Avoid traps that could accidentally trigger income tax treatment (we’ve seen it happen…)

Likewise, your solicitor will:

  • Draft the legal documentation (Share Purchase Agreement, board minutes, resolutions)
  • Make sure the transaction complies with Companies Act requirements
  • Advise on shareholder rights and any potential disputes

Together, we form a team that ensures your buyback is not only legal and compliant, but also tax efficient. We’ll also be able to discuss your situation in the background (with your permission) to ensure that everything is being done in your best interests, and in a timely fashion.

We’ll also be able to cover off any technicalities together, that might affect you, before coming back to you with joined-up advice.

Final Thought: This Isn’t a DIY Job

It’s tempting to Google your way through a process like this. But buying back shares touches accounting, tax, and legal domains, and any mistake can be costly.

If you’re considering a share buyback, let’s talk. We’ll walk you through the process, liaise with your solicitor, and make sure your application to HMRC is robust and clear.

You focus on what’s next for your business. We’ll handle the details.

Sharon Baker