This mini-guide provides an overview of Capital Reductions.

A Capital Reduction is process permitted under the Companies Act 2006: the process does not require a 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 trading 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 captial 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 treament.
  • See Capital reduction: tax treatment

For companies continuing to trade, see Capital reduction: distributing capital reserves and Demergers: what are your options

 

 

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