Share buybacks: A smart exit strategy for shareholders

A company purchase of own shares (also known as a share buyback) occurs when a business repurchases its shares from existing shareholders in cash. This strategy is commonly used to facilitate shareholder exits when the remaining shareholders don’t wish to sell to a third party or bring in another shareholder.

Under the Companies Act 2006, a company can use its reserves to repurchase and then cancel its own shares, provided that specific legal and financial conditions are met. This can be a powerful tool for business owners seeking to simplify ownership or help a shareholder exit the company.

Why could it be beneficial?

A share buyback offers substantial benefits to both the company and its shareholders:

Facilitate shareholder exit at market value:
A buyback allows the exiting shareholder to sell their shares to the company at market value, without the need for an external buyer. The remaining shareholders benefit from the use of the company’s cash reserves to fund the transaction, effectively facilitating the exit without outside involvement.
Tax-efficient exit:
The exiting shareholder may qualify for Capital Gains Tax treatment, which is typically more tax-efficient than being taxed on dividend distributions. Additionally, if specific conditions are met, Business Asset Disposal Relief (BADR) can reduce the tax on the gain, potentially lowering the rate to 10% (with the rate increasing to 14% from April 2025 and 18% from April 2026).
Flexible payment options:
With careful planning, the buyback can be structured in tranches over time through a multiple completion contract, allowing the company to spread the payment, easing cash flow management.

What needs to be done?

Executing a share buyback involves several important steps to ensure that it is both legally compliant and tax-efficient:

Agree on the valuation:
The first step is to agree on a fair market value for the shares being repurchased.
Check distributable and cash reserves:
The company must have sufficient distributable reserves and cash reserves to carry out the buyback while meeting its working capital needs.
Advance clearance procedure:
To ensure the buyback is treated as a capital gain (the more tax-efficient option), we recommend obtaining HMRC clearance. This Advance Clearance Procedure ensures the buyback meets the necessary tax conditions, including:
- Trade Benefit Test: The buyback must primarily benefit the company’s trade.
- Ownership Period: The shares must have been owned by the seller for at least 5 years.
- Substantial Reduction: The seller’s shareholding must be substantially reduced (by 75% or more).
- No Connection: The seller must no longer be connected with the company after the buyback.
- Residency: The seller must be UK resident in the tax year in which the purchase takes place.
Shareholder approval:
The buyback must be approved by the shareholders, and it must comply with the company’s articles of association and shareholder agreements.
Payment and submissions to companies house and HMRC:
Once the buyback is completed, the company must make the payment to the exiting shareholder and submit the relevant forms to Companies House and HMRC. Additionally, Stamp Duty of 0.5% is payable on the purchase price of the shares unless the purchase price is £1,000 or less.

Why work with us?

We specialise in accounting and tax, and we can help you through every stage of the share buyback process. From planning the purchase of own shares, to valuations, advance clearance, and liaising with HMRC and legal experts, we ensure the entire process is managed with maximum tax efficiency and full compliance.

Additionally, if a company purchase of own shares (CPOS) isn’t the right solution for your business, we can explore alternative restructuring opportunities that align with your goals. Whether you’re looking for ownership restructuring or exit planning, we’re here to offer the expertise you need.

Interested in exploring a share buyback for your business?

Contact us today to schedule a consultation. Whether it’s a share buyback or another restructuring strategy, we’ll help you structure a tax-efficient and compliant solution that meets your business needs.