Purchase of own shares: payment in cash or kind?

A client company of ours is looking to purchase its own shares by transferring a property to a retiring shareholder instead of paying cash. At first sight, this would not appear to be legally possible as HMRC guidance in the Company Taxation Manual at CTM17505 states that a payment must be made in cash. However, this appears to contradict the decision in BDG Roof-Bond Ltd v Douglas [2000] 1 BCLC 401, where the court held that a transfer of assets is possible, being akin to a dividend in specie.

Section 691 Companies Act 2006 merely requires that the shares must be paid for on purchase – there is no specific requirement for this to be in cash.

First, is the view of HMRC correct?

Secondly, if it is valid, will the transaction be exempt from stamp duty land tax on the grounds that no consideration is given? This would be so if we were dealing with a dividend in specie (provided that the transfer is not in satisfaction for a declared dividend) or company liquidation.

Query 17,523 – X Man

Answer:

In my view HMRC are correct. A purchase of own shares by a company must be paid for in cash. Payment cannot be deferred.

This is the position taken in Buckley on the Companies Acts citing the decision of the House of Lords in IRC v Littlewoods Mail Order Stores [1965] AC 135 as authority for the proposition that the words ‘sale’ and ‘purchase’ in ordinary legislative usage require an exchange of property for cash and not for any other form of property.

The remarks of Park J in BDG Roof-Bond Ltd v Douglas that the word ‘payment’ in section 159(3) Companies Act 1985 (in effect, the predecessor to section 691 Companies Act 2006) was not limited to payment in money but also included payment by transfer of assets were obiter.

For the sake of completeness, I would add that, if HMRC were wrong and the transaction could be structured as X Man sets out, for SDLT purposes the transfer of the property would be in consideration of the shares given up by the retiring shareholder. As X Man says, a distribution in specie consisting of the transfer of an interest in land is only free of SDLT where there is no chargeable consideration.

Marilyn Merlot (Ann Humphrey)

First published in Taxation magazine Readers’ Forum www.taxation.co.uk