Reduction of share capital

A limited company can reduce its share capital, including its share premium account, under section 641 of the Companies Act 2006. A private company can do it by special resolution supported by a directors’ solvency statement, and any company can do it by special resolution confirmed by the court. The reserve created is usually treated as a realised, distributable profit.

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Why would a company reduce its share capital?

Share capital and share premium are locked in to protect creditors: they cannot be paid out as dividends. A reduction releases that protection in a controlled way. Typical reasons are:

eliminating a deficit on the profit and loss reserve so the company can pay dividends again;
turning a large share premium account, often left from an earlier investment round, into distributable reserves;
returning surplus capital to shareholders, for example before a sale or restructuring;
creating reserves to fund a share buyback out of profits instead of out of capital.

Section 641(4) gives the main methods: extinguishing or reducing liability on partly paid shares, cancelling paid up capital that is lost or unrepresented by available assets, and repaying paid up capital in excess of the company’s wants. Section 641(3) allows a reduction “in any way”, subject to the restrictions below. Section 610(4) applies the reduction rules to the share premium account as if it were paid up share capital.

Which route should the company use?

Point	Solvency statement route	Court route
Who can use it	Private companies limited by shares only	Any limited company with a share capital
Resolution	Special resolution	Special resolution
Main safeguard	Directors’ solvency statement made not more than 15 days before the resolution	Court confirmation, with creditors able to object where capital is repaid or liability reduced
Takes effect	When Companies House registers the documents	As set out in section 649, generally on registration of the order and statement of capital
Companies House fee	£20, or £89 for the same day service	£20

Some restrictions apply to both. The company’s articles can restrict or prohibit a reduction (section 641(6)). A reduction cannot be timed to take effect later than the date the resolution takes effect (section 641(5)). Under the solvency statement route, a reduction cannot leave no member holding shares other than redeemable shares (section 641(2)). Section 641(2A) also stops either route being used as part of a court scheme for someone to acquire all the shares, except where a new holding company is put on top with the same shareholders.

The court route remains necessary for public companies. In England and Wales “the court” means the High Court (section 641(7)). Where a reduction involves repaying paid up capital or reducing liability for unpaid capital, creditors who can show a real likelihood that the reduction would leave the company unable to pay their debt may object, and the court must be satisfied that each objecting creditor has consented, been paid or been secured before it confirms (sections 645, 646 and 648).

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What must the solvency statement say?

Under section 643, a solvency statement is a statement that each of the directors has formed the opinion that:

at the date of the statement, there is no ground on which the company could then be found unable to pay or otherwise discharge its debts; and
the company will be able to pay its debts as they fall due during the following year, or, if a winding up is intended to start within twelve months, that it will be able to pay its debts in full within twelve months of the winding up starting.

The directors must take into account all liabilities, including contingent and prospective liabilities. The statement must be in the prescribed form, dated and naming each director. Because the opinion is that of each director, every director must be able to form it. A director who makes the statement without reasonable grounds, where it is delivered to Companies House, commits an offence carrying up to two years’ imprisonment on indictment (section 643(4) and (5)). This is the same kind of judgment directors make under their general duties, and working papers supporting it are worth keeping.

The statement must be made not more than 15 days before the resolution is passed (section 642(1)). With a written resolution, a copy must go to every eligible member with the resolution; at a meeting, it must be available throughout the meeting (section 642(2) and (3)).

What is filed at Companies House?

Within 15 days after the resolution, the company must deliver to Companies House (section 644):

a copy of the solvency statement;
a statement of capital showing the capital as reduced, on form SH19;
a copy of the special resolution, which is also required under section 30; and
a statement by the directors confirming that the solvency statement was made not more than 15 days before the resolution and was provided to members as required.

The resolution does not take effect until the solvency statement and statement of capital are registered (section 644(4)). Companies House accepts SH19 supported by a solvency statement through its upload service; a reduction supported by a court order must be sent by post. Late filing does not invalidate the resolution (section 644(6)), but nothing can be paid out against the new reserve until it has taken effect.

Is the reserve created distributable?

Section 654 starts from the position that a reserve arising from a reduction is not distributable, but allows exceptions by order. Article 3 of the Companies (Reduction of Share Capital) Order 2008 (SI 2008/1915) provides that:

for a private company using the solvency statement route without a court application, the reserve is treated as a realised profit;
for a court approved reduction, the reserve is a realised profit unless the court orders otherwise;
either result can be displaced by the resolution, the articles, or an order of or undertaking given to the court.

A distribution still has to pass the section 830 test that it is made out of profits available for the purpose, taking into account any remaining realised losses. See how to pay dividends legally.

How are shareholders taxed?

If the reduction simply creates a reserve and the company later pays a dividend from it, the shareholders receive an ordinary dividend, taxed at the dividend rates. If the reduction itself repays share capital, HMRC’s Capital Gains Manual at CG58620 explains that the part of the payment reflecting a return of capital is not an income distribution and may be a capital distribution, treated as a disposal of an interest in the shares under section 122 TCGA 1992. Anything paid in excess of that is generally an income distribution. Where a reduction forms part of a wider plan, such as a sale or a company closure, the anti avoidance rules for distributions deserve separate advice.

What does a reduction look like in practice?

Illustration only. A private company has share capital of £100, a share premium account of £400,000 from an earlier investment and a profit and loss deficit of £150,000. It cannot pay dividends.

On 1 March the directors make a solvency statement, having reviewed cash flow forecasts and contingent liabilities.
On 10 March the members pass a written special resolution reducing the share premium account to nil. This is within 15 days of the statement.
By 25 March the company files the solvency statement, SH19, the resolution and the directors’ compliance statement.
Once registered, the £400,000 reserve is a realised profit. After absorbing the £150,000 deficit, £250,000 is available for distribution, subject to the directors being satisfied that paying it is consistent with their duties.

What are the common mistakes?

Signing the solvency statement more than 15 days before the resolution.
Omitting the directors’ compliance statement under section 644(5).
Paying a dividend before Companies House has registered the documents.
Ignoring contingent liabilities, such as guarantees or disputed claims, in the solvency assessment.
Using the solvency statement route for a public company, which is not permitted.
Delivering a solvency statement that was not given to members in the required way, which is an offence by every officer in default (section 644(7)).

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.