How to plan your exit: selling shares back to the company

Every business owner will one day exit their company – the only question is when and how. Whether your goal is to retire or realise the value you’ve built, the decisions you make now will shape the outcome for you, your family, and your employees.

That’s why I’ve partnered with legal specialists Stephens Scown to create this four-part series, “How to Plan Your Exit: 4 Smart Strategies for Business Owners.”

Over the coming weeks, we are exploring four of the most common routes to exit and the scenarios in which these routes are commonly used. This is the first article dealing with the exit of some, but not all, shareholders from an ongoing business.

Exiting your business: selling shares back to the company

For many business owners, there comes a point where it’s time to step away. One solution is for the company itself to buy back your shares – known as a Company Purchase of Own Shares (CPOS).

This is often an appropriate choice where no third-party buyer can be found, when your fellow shareholders want to remain in the business or when there is a shareholder dispute. Done well, it can provide certainty for the exiting shareholder and stability for the company.

How it works

A CPOS is exactly what it sounds like: the company purchases the shareholder’s shares, pays cash for them, and then (usually immediately) cancels them. This reduces the total number of shares in issue and increases the remaining shareholders’ relative stake in the business.

With frequent changes to tax policy, timing can be important. In some cases, there may be an advantage to completing a buyback before key Budget announcements, making early planning crucial.

When this strategy works well

I most often see a CPOS used in two situations:

Retirement planning: allowing a shareholder to exit while leaving the business in the hands of the remaining shareholders..
Shareholder disputes or deadlock: enabling one party to leave without forcing a full company sale.

It’s a flexible route that can meet both personal and business objectives – but the tax and legal requirements must be handled carefully.

Tax perspective – getting the right treatment

From a tax point of view, the default treatment is that the payment to the exiting shareholder is an “income distribution” and therefore subject to income tax. However, if certain conditions are met, it can instead be treated as a capital distribution which usually results in significantly lower tax rates:

capital gains rates are typically lower than dividend rates
where shares are eligible for Business Asset Disposal Relief, gains of up to the £1m lifetime limit could be taxed at the lowest capital gains rate (currently 14%), .

To qualify for capital distribution treatment, strict conditions must be met including:

A significant reduction in your shareholding (at least 25%)
Holding less than a 30% interest in the company after the buyback
At least five years of ownership of the shares
You must also be able to demonstrate that the buyback is for the benefit of the company’s trade

Whilst these tests appear straightforward, there are complexities where you could unintentionally fall foul of these conditions. Therefore, we recommend applying for advance statutory clearance to obtain written confirmation from HMRC that it will be a capital distribution.

Valuation and other practicalities

Getting the price right is critical:

Too low: HMRC can substitute the price with market value
Too high: the excess may be treated as taxable income rather than capital

The company must also pay stamp duty at 0.5% of the consideration paid within 30 days.

Legal view – avoiding pitfalls

Our legal partners at Stephens Scown emphasise that a CPOS must comply with the Companies Act.

Dave Robbins, Corporate Associate at Stephens Scown, says:

If the process isn’t followed to the letter, the transaction can be void – meaning the seller technically still owns the shares, and the company’s directors could even face criminal liability.

Key, requirements include:

Paying the full price in cash at the point of purchase (no instalments or loans)
Having sufficient distributable profits – not just cash in the bank
A written agreement between the company and shareholder
Shareholder approval by resolution (excluding the exiting shareholder from voting)

My final thoughts

A company's purchase of its own shares can be a powerful succession planning tool – but it’s not one to undertake lightly. The combination of tax, valuation and legal complexity means there’s real value in getting expert advice early.

At Bishop Fleming, we work alongside legal specialists like Stephens Scown to design, implement and execute buybacks that are robust, tax-efficient and aligned with your personal and business goals.

If you’re considering this option, I’d be happy to start the conversation now – so you can make an informed decision and avoid last-minute surprises.