Situations in which you can reduce your company’s share capital to create a tax refund.
(3-minute read)
We will cover:
- What is capital reduction and when does it apply
- How to make a special resolution to effect capital reduction
What is capital reduction?
Capital reduction reduces the share capital of a company.
A capital reduction is permitted provided that the directors sign a Statement of Solvency.
This statement provides a guarantee that the company will be able to pay all its outstanding debts within the following 12 months. The directors may be held to be personally accountable if this is not true.
By law, a company’s share capital belongs to the company, and not to shareholders. This allows companies to have a cushion of capital (a reserve) out of which it can pay out any debts to third parties.
This reserve is non-distributable to shareholders, unless special cases apply.
This is where a capital reduction comes in.
Why should you reduce your company’s capital?
A capital reduction may be essential if you are considering striking off a company. Share capital and capital reserves will become Bona Vacantia as soon as the company is struck off.
It is therefore essential in order to reduce share capital or other non-distributable reserves prior to striking off. This is not necessary if there is a formal liquidation.
The Treasury Solicitor operated a concession up until 14 October 2011 whereby it would only claim capital in excess of £4,000. Following enactment of HMRC Extra Statutory Concession C16, a company may now distribute up to £25,000 on striking off. The Treasury Solicitor has made assurances that it will not seek to claim Bona Vacantia in respect of a repayment of share capital during striking off.
How to make a capital reduction?
Prior to 1 October 2008, reducing capital required a court approval.
Nowadays, it’s possible to reduce share capital prior to striking off a company.
For example:
A limited company has ceased trading and is solvent. It has £10,000 of issued share capital and a share premium account of £350,000. The directors agree to make a capital reduction and pay the four shareholders £359,996, leaving the company with £4 of share capital prior to striking it off. Note that it is not possible to reduce the share capital to zero before the company is struck off.
This process requires a special resolution.
To do this, the company must take the following steps:
- The directors sign a Declaration of Solvency not earlier than 15 days before.
- The shareholders must pass a special resolution to reduce capital and/or non-distributable reserves.
- The declaration and resolution are filed with Companies house.
Further advice
This is a complex area, as the outcomes will depend on your specific situation.
Reduction in capital may be subject to tax if shares are cancelled, for example.
There also may be a different tax treatment depending on whether the recipient of a distribution is a corporate shareholder or an individual.
If you need further help, do not hesitate to contact us.
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