What is a Capital Reduction? What process must be followed? What are the tax implications? 

Subscribers see Capital Reductions: Distributing capital reserves

This is a freeview 'At a glance' guide to Capital Reductions. 

At a glance

  • A Capital Reduction is a process permitted under the Companies Act 2006. The process does not require a court order.
  • The process is the same whether the company is trading on or is considering ceasing trading.
  • Under a Capital Reduction, the non-distributable share capital or reserves of a limited company may be distributed to shareholders.
  • When a company is ceasing trade it may need to perform a Capital Reduction in order to repay excess share capital and avoid Bona Vacantia. The alternative is a formal liquidation.

See also Ceasing trading: Overview

The tax treatment of a capital distribution made to a shareholder following a Capital Reduction depends on what is being paid, for example:

  • A repayment of share capital is expected to be a deemed disposal of share capital.
  • A Purchase of own shares at a fair value for the shareholder will qualify for capital treatment provided certain qualifying conditions are met.
  • A reduction which is credited to distributable reserves and is then paid out to shareholders by dividend receives Income Tax treatment.
  • See Capital reduction: What are your options?

Useful guides on this topic

Capital reduction: Distributing capital reserves
 A capital reduction allows the previously non-distributable share capital and reserves of a limited company to be distributed to shareholders, without the need for a court order.

Demergers: What are your options?
This guide gives a general overview of the different types of demergers and when they are typically used. 

Distributions & striking off
A distribution of a company’s assets made to its shareholders prior to dissolving or 'striking off' a company is not treated as an income distribution provided that it does not exceed £25,000.

Striking off a company
At a glance: striking off is a Companies Act procedure to end the life of a company.

Bona Vacantia & striking off
What is Bona Vacantia? What does this mean? How does it impact companies?