Introduction

A highly topical area that we are frequently asked to advise on is share buybacks.

Where we frequently see share buybacks being used is as part of succession planning where one shareholder chooses to step back from a business and allow the remaining shareholder(s) to take over.

Before considering a share buyback for any purpose, it is crucial that advice is sought to ensure the tax benefits of doing so are available, as the tax treatment of share buybacks can vary significantly depending on whether or not specific conditions are met.

General treatment

The basic rule, as provided for under section 130 of the Taxes Consolidation Act 1997 (“TCA”), is that any payment in relation to share capital over and above the amount which a company received for a subscription of shares is treated as an income distribution to the shareholder (essentially a dividend) subject to marginal rate income tax.

However, legislation permits a shareholder to avail of Capital Gains Tax (“CGT”) treatment on a buyback of their shares provided the conditions set out in sections 173 TCA to 186 TCA are met. In summary, these conditions are as follows:

• The company purchasing its own shares must be an unquoted trading company or the unquoted holding company of a trading group.
• The redemption, repayment or purchase must be made wholly or mainly for the benefit of the company's trade or the trade (a discussion of the ‘trade benefit test’ is outside the scope of this article) of a 51 per cent subsidiary.
• The redemption, repayment or purchase must not be part of any scheme the purpose of which is to enable the owner of the shares to participate in profits without receiving a dividend.
• The vendor must be resident and ordinarily resident in the State.
• The vendor must have owned or be deemed to have owned the shares for at least 5 years (except in the case of inherited shares when 3 years is sufficient).
• There must be a proportionate at least 25 per cent reduction in the vendor's interest in the issued share capital.
• Post-buyback, the shareholder (and their associates) cannot be connected with the company, i.e. they cannot hold or be entitled to acquire more than 30% of the ordinary share capital of the company:

Ensuring that a share buyback meets the above conditions and is treated as a CGT event will be useful to exiting shareholders who may be eligible for tax relief (e.g. CGT Retirement Relief or CGT Revised Entrepreneur’s Relief) on the disposal of their shares.

Therefore, for these individuals, some of the following high-level considerations will be critical to ensuring that the relevant tax reliefs can be claimed.

Connected Persons

As noted in the conditions listed above, for CGT treatment to apply to a buyback, the shareholder and their associates cannot be connected with the company following the buyback. There is a lengthy list of ‘associated persons’ provided in section 185 TCA of the legislation which includes, for example, a husband and wife who are living together.

Careful planning is needed in situations involving buybacks to ensure that the individual does not remain connected to the company. An example we frequently see is where a husband and wife each own shares in a business and the shares held by one or both of them are being bought back. This situation, unless properly managed, could result in the shareholder who is being bought back remaining connected with the company after the buyback and therefore failing to qualify for CGT treatment on a buyback (and being subject to income tax at marginal rates instead). For this reason, an important aspect of succession planning will be to consider the sequencing of share buybacks

CGT Retirement Relief

In instances where CGT treatment is applied to a share buyback, the exiting shareholder may seek to claim CGT Retirement Relief on the disposal of their shares.

CGT Retirement Relief is available to individuals disposing of shares who meet the relevant conditions prescribed in the TCA (the details of which are beyond the scope of this article). The TCA provides relief from CGT up to certain lifetime limits which are dependent on the individual’s age and whether or not the disposal is being made to a child (or a nephew or niece working on a full-time basis for the business). Therefore, for the purpose of determining the quantum of an individual’s lifetime limit which is remaining, it is necessary to aggregate any previous disposals which have been made by the individual which qualified for the relief.

From 1 January 2025, where an individual qualifies for the relief, a disposal of shares in a family‑company to a child will now count towards the €750,000/€500,000 limit when considering a subsequent disposal to a company controlled by a child‑.

There is now a risk that a disposal of shares from a parent to a child and a separate buyback of shares by a company which is controlled by the child could be aggregated to determine whether the €750,000/€500,000 lifetime limit has been exceeded.

Tax planning is vital to ensure that the share buyback and the disposal to the child are not aggregated together for CGT Retirement Relief purposes. If this situation is properly managed, significant tax savings can be achieved.