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Buying–back shares from employees: the dilemma for close companies

Close companies wishing to buy back shares from employees, in the absence of a sale of the company, have a difficulty in being unable both to have the company itself buy back the shares without giving rise to a ‘dividend tax’ charge (if the shares have been held for less than 5 years) and make a loan to an employees’ trust to fund a purchase by the trust (as this would give rise to a penal charge to tax under the ‘loans to participators’ rules).

A cash contribution to the trust to fund the acquisition of shares would not be deductible for corporation tax purposes (although contributions to fund interest payments on a third-party loan by the trust may qualify for deduction as ‘qualifying expenses’ –see s 1296 CTA 2009) and, if and when the shares are resold by the trust, the proceeds could not be returned to the company as this would be a breach of trust. The idea of a ‘safe harbour trust’ is intended to afford a solution to this dilemma, avoiding ‘tax pitfalls’ without requiring any new tax relief. It is regrettable that this idea in particular has been ‘shelved’.