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ESG Diligence: The Key To Sustainable M&A Transactions
AAB / Blog / Too much capital? Your company may have more options than you thought
BLOG26th Oct 2015
For some years now, it’s been possible to reduce the capital in your company without going to court. More owners could probably take advantage of the freedom on offer.
For many years, one of the fundamental concepts in company law was the notion that issued share capital had to be maintained and couldn’t be returned. In fact, this was generally accepted for more than a century until the Companies Act of 2006 made it to the statute book.
Over the best part of a decade now, private companies have no longer had to go to court to reduce their capital, but it’s taken a fair amount of time for owners – and even their accountants – to catch up with the implications.
Your company might simply have too much capital, which it just doesn’t need. Imagine a scenario, for instance, in which you intended to invest in land or property, but the right opportunity didn’t arise. Returning capital might be a legitimate and sensible step.
If you have cash in the company but are unable to pay a dividend because there are no distributable profits, you can reduce capital to create a reserve, out of which future dividends can be paid. Although there is no tax charge on the creation of the reserve, the dividends will be liable to income tax.
An alternative to the creation of a reserve is the return of cash directly to a shareholder. As we are talking about a capital payment rather than a dividend, the only liability will be for capital gains tax. And if you are operating a trading company, Entrepreneurs’ Relief should apply, reducing CGT to 10%. My advice, however, is that you seek clearance in advance from HMRC to ensure compliance with Transactions in Securities regulations.
Although the liberalisation which came with the 2006 legislation was a reaction to the very restrictive regime that had existed before, the government ensured that a number of key safeguards were left in place. Before proceeding with a return of capital, directors have to make a Declaration of Solvency, for instance, which states the company will be able to meet its debts for the foreseeable future. Your accountant should be able to advise you on the other steps you need to take to take full advantage of the changes.