Forbes Dawson Tax Bite – Capital reductions

We are seeing companies distribute funds by way of a dividend when they should be considering capital reductions.

A dividend is taxable at an effective rate of 30.56% (for high earners) whereas a capital reduction can be taxable at a 10% capital gains tax rate if Entrepreneurs’ Relief applies.

There needs to be sufficient share capital to make a payment through a capital reduction and for these purposes share capital can include share premium account. This will often be the case after a holding company has been inserted over an existing company. This is because the holding company is treated as issuing share capital equivalent to the value of the existing company.

Due to fairly recent changes in the Companies Act capital reductions are relatively easy to achieve.

This kind of cash extraction should not be undertaken without having due regard to transactions in securities legislation. If HMRC are able to invoke this then the capital reduction would be taxable at dividend rates. However the onus is on HMRC to invoke this legislation and arguably a capital reduction is not a transaction in securities.

Tax Bites are a fortnightly article featuring simple updates about key tax opportunities for other professional colleagues and clients.  For further details, contact the author or your usual Forbes Dawson contact via our ‘Contact Us’ page.

 

Search

Archives

Sign up for our newsletter

Interested in receiving the latest tax planning ideas?

Sign up to Tax Bites – our weekly update offering practical but effective tax saving tips.

Contact Us

You can use this form to request us to give you a call or if you prefer just leave us a message. Please be sure to leave us a contact number or email address for you and we will get back to you as soon as we can.

Phone
0161 927 9277

Email
office@forbesdawson.co.uk

Address
Fairbank House
Ashley Road
Altrincham
Cheshire
WA14 2DP