Closed Company Share Transfer Tax Planning

When a shareholder wishes to purchase another shareholder’s shares in a closely-held company, the transaction will generally have tax implications for both the buyer and the seller. However, the tax consequences may vary depending on the circumstances and the transaction’s structure. We have listed some strategies that could potentially reduce tax liability:

Purchase of shares as a capital transaction: If the sale of shares is treated as a capital transaction, the seller may be subject to Capital Gains Tax (CGT) instead of Income Tax. CGT rates (10% or 20% for non-residential property) are generally lower than Income Tax rates (up to 45% for additional rate taxpayers). To ensure the transaction is treated as a capital transaction, the seller should ensure they have held the shares for a sufficient period (usually at least 12 months) and avoid any arrangements that could lead HMRC to treat the sale as an income transaction.

Entrepreneurs’ Relief (now Business Asset Disposal Relief): If the seller qualifies for Business Asset Disposal Relief, they may benefit from a reduced CGT rate of 10% on the sale of shares, up to a lifetime limit of £1 million. In order to qualify, the seller must have held the shares for at least 24 months and meet specific conditions related to their involvement in the company. HMRC guidance (CG64100) provides more information on the Business Asset Disposal Relief qualification criteria.

Holdover Relief: In certain circumstances, the seller may claim holdover relief, effectively deferring the CGT liability until the buyer disposes of the shares. This Relief is available for gifts of business assets or shares sold at undervalue. The buyer and the seller must jointly claim holdover relief. HMRC guidance (CG66450) explains the conditions for claiming holdover relief.

Employee Ownership Trust (EOT): Certain tax advantages may apply if the shares are held in an EOT. When a company’s controlling interest (more than 50% of the shares) is sold to an EOT, the seller may be able to claim full CGT relief, making the transaction tax-free. Additionally, the company may be able to make tax-free bonus payments to employees, up to £3,600 per employee per tax year. HMRC guidance (CG67800) details the tax treatment of EOTs and the qualifying conditions for CGT relief. 

It is important to consider the specific circumstances and consult a tax professional to determine the most tax-efficient way to structure a share purchase transaction. The tax consequences can vary depending on the buyer’s and seller’s tax positions and the nature of the company’s operations. You can call us to discuss your personal circumstances with our specialist tax advisors.