Last chance saloon for capital reductions?

Capital reductions have been quite a tax-efficient way of extracting profits from a company for some years now.
This opportunity is particularly applicable when a company has significant capital, such as a holding company which acquired another company by way of a share for share exchange.


Five years ago a holding company was inserted above a trading company by way of a share for share exchange. In this transaction the holding company issued 5M £1 shares to acquire the trading company which was worth £5M. Based on current rules it is tempting for the shareholder of the holding company to extract funds by way of a capital reduction. This could involve a dividend being paid up to the holding company and using the funds received to reduce its capital. This has the attraction of potentially extracting funds at an effective rate of 10% (assuming Entrepreneurs’ Relief) whereas a higher rate dividend would be taxable at 30.56%.

The big question in the example above has always been can HMRC seek to tax such a capital reduction as a dividend using Transactions in Securities legislation (TISL) and thus erode the advantage? General wisdom on this subject has been that the answer is no, largely on the basis that amounts which represent a return of share capital are excluded from the TISL legislation. Another feature of TISL which has proved difficult for HMRC is that the onus has always been on them (rather than the taxpayer) to enforce it.

New Legislation

It seems that the party will be over from 6 April 2016. The draft finance bill which was published on 9 December 2015 includes measures to combat the kind of scenario mentioned above. In particular:

  1. The repayment of share capital and share premium will be specifically brought within TISL.
  2. TISL will be brought within self-assessment rules and so the onus will be on the tax payer to apply them.

Potential Action

In many cases there will be a small window of opportunity before 6 April 2016 before the main attractions of capital reductions could be lost forever.




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