Advice for Solicitors: Company purchasing its own shares

In a previous post we outlined the potential availability of retirement relief on the sale of business assets. A share buyback, may allow your clients to access cash from their company in a very tax efficient manner when used in conjunction with retirement relief.

For retirement relief to apply, any buyback of the shares will have to qualify as a Revenue Approved share buyback under sections 177 – 181 TCA 1997. Where the buyback qualifies as a Revenue Approved share buyback, the disposal of the shares by the couple will be liable to Capital Gains Tax rather than Income Tax.

The provisions, as they apply to shares in unquoted trading companies, contain many conditions to secure the CGT treatment. Generally, CGT treatment will only apply where the transaction is carried out for the purpose of benefiting the trade.

As well as satisfying the Trade Benefit Test, the following conditions must also be satisfied in order for the share buyback to qualify for Capital Gains Tax treatment:

1. Shares bought-back must be in an unquoted trading company
2. The vendor’s interest in the company must be substantially reduced as a result of the share buyback
3. The shares bought-back must have been held for a continuous period of 5 years ending on the date of the buyback
4. Immediately following the buyback the vendor cannot be connected to the company
5. the acquisition of the shares by the company must not form part of a scheme or arrangement

This is a very complex area of tax legislation but when used correctly can potentially lead to a significant tax saving. Should you wish to discuss this matter further, please do not hesitate to contact us.