Selling shares when a director or shareholder leaves a company

When a director or shareholder leaves a small or family-run company, one of the key steps is deciding what happens to their shares. In most cases, it’s preferable for the shares to be sold either back to the company or to the remaining shareholders who continue managing the business.

The company’s accountant usually helps determine the market value of the shares, after which the parties can decide the best structure for the transaction.

There are two main options:

1. A company share buyback, where the company repurchases the shares; or

2. A shareholder-to-shareholder sale, where the remaining shareholders acquire the shares directly.

A direct share sale is often easier to complete, but a company share buyback can sometimes provide tax advantages if handled correctly.

Share sale vs. company share buyback

In a shareholder-to-shareholder sale, the departing shareholder transfers their shares to another shareholder at an agreed value. Payment might be made upfront, in instalments, or linked to future profits through an earn-out arrangement. The buyer funds the purchase and increases their ownership proportion.

By contrast, in a company share buyback, the company itself purchases the shares. This process must comply strictly with the Companies Act 2006. If not, directors could breach their duties, and HMRC may refuse to grant favourable tax treatment.

The company must have sufficient distributable reserves to finance the buyback. Payments can come from retained profits or, in some cases, capital. A simplified procedure exists for smaller transactions.

Tax implications of a company buyback

When a company buys back shares, the payment to the shareholder is normally treated as income and taxed as a dividend. However, if specific conditions are met, capital gains tax (CGT) treatment may apply, which can be more tax-efficient.

To qualify for CGT treatment, HMRC requires that the seller:

• Has held the shares for at least five years;

• Is selling all or most of their shares (reducing their holding by more than 25%);

• Will hold less than 30% of the company’s total share capital after the sale; and

• Is selling for the benefit of the company’s trade (for example, to retire or resolve a dispute).

It is often advisable to obtain advance clearance from HMRC confirming that the transaction qualifies for CGT treatment. If so, the seller may be able to claim Business Asset Disposal Relief (Entrepreneurs’ Relief) and pay 10% CGT on gains up to £1 million.

Legal requirements for a company buyback

To ensure compliance with company law, the following documents are typically required for a buyback:

• A buyback contract between the company and the shareholder;

• Board minutes approving the transaction;

• A directors’ statement (if payment is made from capital);

• A shareholders’ resolution authorising the buyback; and

• A stock transfer form to complete the legal transfer.

Our corporate solicitors can help you prepare the necessary documentation and ensure the process complies with the Companies Act 2006.

Can one director sell shares to another?

Yes — a director can usually sell shares to another director, but the company’s Articles of Association and any shareholders’ agreement should be reviewed first. These documents may include restrictions on transfers or require shareholder approval.

If the board lacks authority to approve the transfer, a shareholder resolution may be necessary before the sale proceeds.

Key takeaway

When a shareholder or director leaves a private company, deciding between a share sale and a company buyback requires careful consideration of tax, funding, and legal compliance. Obtaining professional advice early can help structure the deal efficiently and ensure both parties meet their obligations.

For tailored advice on director exits, share buybacks, and shareholder agreements, contact our Corporate Law team today.