October 26th, 2012 / Insight posted in

Tax rules for a share buyout

DH writes: I want to buy the shares of a minority partner in the business where I work and am searching for the best way to finance the deal. If I borrow the money, can the interest on the loan be set against income tax? If not, can I purchase shares in my employer’s company and make a claim as an employee?

Under certain circumstances, it is possible to get tax relief for the interest on loans used to buy shares, writes Michael Snyder, senior partner at Kingston Smith. For the company to qualify, it must be a “close” company or an employee-controlled company. In practice, this usually means your company must be owned by five or fewer individuals, or be controlled by employees who hold less than 10% of the company. To qualify as an investor, you must either be an employee actively involved in the management of the business, or own at least 5% of the company. You should ensure that the funds from the borrowings are used to buy the shares. It is common for a loan to have a mixed purpose – for example, where a mortgage extension is used to buy shares. In this case, the Inland Revenue will generally allow tax relief on the part of the interest that relates to the share purchase. Tax relief is given by deducting the interest from your total income. Thus a higher-rate taxpayer will get 40% relief on the qualifying interest paid. Relief is claimed on your tax return. You should also check whether your employer has an All Employee Share Ownership Plan (Aesop). Within limits, this allows shares to be given to employees free of tax, and is therefore a tax-efficient way of rewarding staff and promoting share ownership. If the purchase of shares is to become a regular event at your company, then an Aesop may be worth considering.