Mark McLaughlin looks at potential tax implications for shareholders if a company purchase of own shares does not satisfy legal requirements.
Company purchases of own shares can often be helpful. For example, a shareholder in a family trading company may wish to retire and exit the company to make way for the next generation.
It’s the law
However, the transaction must satisfy company law requirements (in Companies Act 2006) to be a valid company purchase of own shares. If the company fails to comply with them, the transaction is treated as void, and an offence is committed.
For example, the company is required to purchase its own shares out of distributable profits (or the proceeds of a fresh share issue to finance the purchase), and the company must pay for the shares on completion (subject in both cases to limited).