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Where Taxpayers and Advisers Meet

Tax on Share Premium Reduction Tfr to Reserves

Joined:Tue Aug 25, 2020 7:47 am
Tax on Share Premium Reduction Tfr to Reserves

Postby Surrey12 » Sun Apr 18, 2021 5:06 pm


I just would be very grateful for advice on any tax consequence in the case of a private company reducing share capital.

Current Balance Sheet:
Share Capital 10
Share Premium 1000
P&L Reserve (900)

The entries I believe to be made from an accounting perspective are:

Dr Share Capital 9
Cr Cash 9
Dr Share Premium 900
Cr P&L Reserve 900

Balance Sheet becomes:
Share Capital 1
Share Premium 0
P&L Reserve 100

Is there any tax consequence of creating a distributable reserve this way on the 900 cancellation of the share premium account?

Many thanks for any help you can give.

Joined:Thu Dec 03, 2009 5:35 pm

Re: Tax on Share Premium Reduction Tfr to Reserves

Postby Incredulum » Thu Jun 03, 2021 10:04 am

That's a perfectly straightforward way of doing it (though I can't remember off the top of my head whether you have to turn the share premium into shares before you can reduce it - I suggest you check this point if you don't know the answer, rules depend on the various types of reserves you are getting rid of). You have created distributable reserves from your share capital/premium. Presumably you are au fait with the company law requirements for filings etc. Make sure that the documentation has been filed with Companies House BEFORE you contemplate a distribution. In the case of a limited company (some of) these filings only take effect after registration at Companies House. Any distribution made prior to that point will be an 'illegal' distribution.

There is no tax consequence for the company arising from the double entry you describe.

However, a shareholder, if an individual in receipt of a distribution from the distributable reserves you have now created, will pay income tax on the distribution received. So there's obviously a slight problem from their perspective in so far as they contributed a capital sum to the business, and instead of getting their capital back they are in receipt of taxable income. Worse, they likely don't even get a capital loss owing to the depreciatory transactions rules.

Depending on the sums involved (i.e. if there are several noughts on the end of the numbers in your illustration) you might be better off liquidating the company, so the shareholders obtain capital treatment on the return of their capital, and starting a new company. So as to avoid the anti-phoenixing rules you would need to distribute all distributable reserves first - though it appears there aren't any.

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