At a glance

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.

For a Small and Medium-Sized Enterprise (SME) a reduction of capital may be desirable if the company wishes to:

  • Return excess share capital or share premium to shareholders.
  • Purchase shares from outgoing shareholders and there are insufficient reserves to permit a purchase out of distributable profits.
  • Reduce its assets prior to undertaking an informal dissolution process.
  • Use capital to turn a profit and loss deficit into a surplus and so create distributable reserves and allow dividends to be paid out to shareholders.
  • Demerge one part of a business from another or split up a group and a statutory demerger is not possible.


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.

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

Purchase (repurchase) of own shares out of distributable reserves
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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