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.

Index to our 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 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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