A capital reduction is a process by which share capital or other capital reserves, including the share premium account of a company, are repaid to shareholders.

This is a freeview 'At a glance' index to Capital reductions.

A company reduces its capital, and is therefore required to use the process of 'Capital Reduction' when it:

  • Return excess share capital or share premium to shareholders.
  • Purchases its own shares from outgoing shareholders and there are insufficient reserves to permit a purchase out of distributable profits.
  • Reduces its assets prior to undertaking an informal dissolution process.
  • Uses a Capital Reduction capital reserves to turn a profit and loss deficit into a surplus and so create distributable reserves and allow dividends to be paid out to shareholders.
  • Demerges one part of a business from another or split up a group and a statutory demerger is not possible.
  • A Capital reduction will generally result in a payment (a distribution) to a shareholder

Taxing a capital reduction

The shareholder may be exempt, subject to Income Tax or Capital Gains Tax on the amount received depending on the subject matter of the Capital reduction transaction and type of shareholder, see Capital reduction: Tax treatment

Useful guides on this topic

Capital reduction: Distributing capital reserves
Outline note describing the capital reduction process

Capital reduction: Tax treatment
Note describing the tax treatment of the different capital reduction sequences outlined above.

Demergers: what are your options?
What are the different types of demergers that are available when you want to reorganise your business? What are the situations where they are typically used? What is a capital reduction demerger?

Purchase (repurchase) of own shares out of capital
Step by step guide to a purchase out of capital.

Purchase (repurchase) of own shares
Summary of the process without a purchase out of capital.

Solvency statement: Reduction of capital (winding up)
Statement for the directors to sign.

An Index to Reorganisations and Demergers
A series of super practical tax guides providing an outline of the tax treatment together with step guides and tax clearance templates.


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