A well-argued Share Valuation saves thousands
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Published: 22 Oct 2020
To maximise the financial return (and reduce the stress levels) when you come to retire and realise the investment in your company, you’ll need a considered and well thought through plan that’s acceptable to HMRC and to you as a taxpayer.
Acceptable to HMRC and the taxpayer
In this example a major shareholder and senior member of the board of a private trading company wishes to retire and realise his investment in the company.
Tax legislation allows for the company to buyback the shareholding under certain circumstances, providing clearance to the transaction is obtained by the company from HMRC.
This enables the buyback to be treated as a capital distribution on which capital gains tax is chargeable, with entrepreneurs’ relief, at 10%.
Obviously, this is preferable to the taxpayer, otherwise the share buyback would be treated as an income distribution and subject to the highest rates of income tax.
One of the main requirements for a share buyback to be treated as a capital distribution is that it is for the benefit of the company’s trade and is not a scheme for the avoidance of tax.
Acceptable to HMRC, but not so palatable for the taxpayer
In the case J.Boulting V HMRC [August 2020], Mr Boulting wished to retire, give a 38% interest to his son and sell an 8% interest back to the company.
Formal clearance was made by the company’s accountants, giving all the required information, including that the share buyback of the 8% interest in the company was for the purpose of benefiting the trade carried on by the company and was not part of a scheme to enable Mr Boulting to avoid tax or to participate in the profits of the company, without receiving a dividend. Clearance to the transaction was given by HMRC.
After completion and submission of Mr Boulting’s personal tax return, disclosing the sale of the shares back to the company, HMRC concluded that these shares were each worth £66,900 and not £600,000, which was the valuation relied upon by Mr Boulting in the clearance application.
Consequently, HMRC maintained that, as the price paid by the company for the shares was considerably more than their market value, it cannot be for the benefit of the company’s trade but rather for the benefit of Mr Boulting.
As a result, the share buyback should be assessed to income tax and not capital gains tax, which resulted in further £1,008,621 of tax due to HMRC.
Mr Boulting has been granted leave to appeal to the First Tier Tribunal to resolve the issue of difference in the share valuations and consequent tax treatment.
A well-argued share valuation
This demonstrates how important it is to have a thorough and well-argued share valuation to support any clearance application on the buyback of shares. This not only brings peace of mind but also avoids interest on late payment of tax and penalties for incorrect disclosure on a tax return.
If you are considering a valuation of a share buyback, you are welcome to call and discuss it with David Cane on 07749 080 806 or email David Cane.
