The capital redemption reserve

Q: When must a company create one?

There are four triggers: Redemption or purchase wholly out of profits. The amount by which issued share capital falls is transferred to the reserve (section 733(2)). This applies to both redeemable shares and ordinary buybacks. Funding partly from a fresh issue. If shares are redeemed or bought wholly or partly from the proceeds of a fresh issue, and those proceeds are less than the nominal value of the shares cancelled, the difference is transferred (section 733(3)). This does not apply where a private company also makes a payment out of capital under Chapter 5 or section 692(1ZA). A private company payment out of capital. If the permissible capital payment is less than the nominal amount of the shares, the difference goes to the reserve (section 734(2)). Section 734(1) applies this both to the formal Chapter 5 procedure and to the smaller buybacks out of capital allowed by section 692(1ZA). Cancelling treasury shares. When shares held in treasury are cancelled, the fall in share capital under section 729(4) is transferred (section 733(4)). See treasury shares. No reserve arises while shares are simply held in treasury, or where a buyback is funded entirely by a fresh issue raising at least the nominal value of the shares cancelled, or where a private company's permissible capital payment equals or exceeds that nominal value.

Q: What can the reserve be used for?

Bonus shares. Section 733(5) lets the company use the reserve to pay up new shares allotted to members as fully paid bonus shares. The process is in bonus issues. A later payment out of capital. Where a private company's permissible capital payment exceeds the nominal value of the shares it buys, section 734(3) allows the excess to be charged against the capital redemption reserve, share premium account, fully paid share capital or unrealised profits in a revaluation reserve. Case 4 above could use an existing reserve this way. Beyond those, section 733(6) applies the rules on reduction of share capital to the reserve. It cannot be used to pay a dividend, and it is not available to absorb losses without a formal reduction. Unlike the share premium account under section 610(2), there is no provision allowing it to absorb share issue expenses.

A capital redemption reserve is an undistributable reserve that section 733 of the Companies Act 2006 requires a limited company to create when share capital is cancelled on a redemption or buyback and is not replaced by new capital. The amount is normally the nominal value of the cancelled shares that was paid for out of profits or, on a private company capital payment, any shortfall below nominal value. The reserve can be used to pay up bonus shares, but otherwise it is treated as paid up share capital and can only be released by a formal reduction of capital.

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Why does the reserve exist?

When a limited company redeems shares, section 688 treats them as cancelled and reduces issued share capital by their nominal value. When it buys back shares and does not hold them in treasury, section 706 does the same. Share capital is a fund that creditors can rely on not being paid out to members, so cancelling it without a replacement would weaken their position. The capital redemption reserve fills that gap: the company moves an equal amount out of distributable reserves into a reserve that is locked in the same way as share capital.

The reserve is listed by name among a public company’s undistributable reserves in section 831(4)(b), and section 733(6) applies the rules on reducing share capital to it as if it were paid up share capital. The entries made at the time of a buyback are set out in accounting for a company purchase of own shares. This page follows the reserve itself: when it arises, how big it is and what can later be done with it.

When must a company create one?

There are four triggers:

Redemption or purchase wholly out of profits. The amount by which issued share capital falls is transferred to the reserve (section 733(2)). This applies to both redeemable shares and ordinary buybacks.
Funding partly from a fresh issue. If shares are redeemed or bought wholly or partly from the proceeds of a fresh issue, and those proceeds are less than the nominal value of the shares cancelled, the difference is transferred (section 733(3)). This does not apply where a private company also makes a payment out of capital under Chapter 5 or section 692(1ZA).
A private company payment out of capital. If the permissible capital payment is less than the nominal amount of the shares, the difference goes to the reserve (section 734(2)). Section 734(1) applies this both to the formal Chapter 5 procedure and to the smaller buybacks out of capital allowed by section 692(1ZA).
Cancelling treasury shares. When shares held in treasury are cancelled, the fall in share capital under section 729(4) is transferred (section 733(4)). See treasury shares.

No reserve arises while shares are simply held in treasury, or where a buyback is funded entirely by a fresh issue raising at least the nominal value of the shares cancelled, or where a private company’s permissible capital payment equals or exceeds that nominal value.

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How is the amount calculated?

The working principle is that the reserve equals the part of the cancelled nominal value that has not been replaced by new share capital or met from capital. The permissible capital payment is the amount needed to meet the price after first applying available profits and the proceeds of any fresh issue (section 710).

Illustration only. Each case involves £1 ordinary shares.

Case	Facts	Transfer to reserve
1. Out of profits	2,000 shares bought for £30,000 from distributable profits	£2,000 (nominal value cancelled)
2. Fresh issue shortfall	10,000 shares redeemed at par for £10,000; new shares raise £6,000 and profits fund £4,000	£4,000 (£10,000 less £6,000)
3. Capital payment below nominal	10,000 shares bought for £25,000; available profits £18,000, so permissible capital payment £7,000	£3,000 (£10,000 less £7,000)
4. Capital payment above nominal	10,000 shares bought for £25,000; available profits £5,000, so permissible capital payment £20,000	Nil; the £10,000 excess over nominal may be charged to existing capital accounts (see below)
5. Treasury cancellation	5,000 treasury shares cancelled	£5,000

In case 1 the full £30,000 comes from the profit and loss reserve: £28,000 as the premium and £2,000 transferred to the capital redemption reserve. Case 3 works the same way, with £18,000 of profits used in total, £3,000 of it moved to the reserve. The common error is to transfer the price rather than the nominal value, or to forget the transfer altogether on a small buyback out of capital under section 692(1ZA); for that route see small buybacks out of capital.

How is the reserve shown in the accounts?

In the formats for large and medium sized companies (Schedule 1 to SI 2008/410), the capital redemption reserve has its own line, item K.IV.1, within other reserves. The small company formats (Schedule 1 to SI 2008/409) show other reserves as a single item, K.IV, so a small company may include the reserve there and describe it in the notes. FRS 102 paragraph 4.12(b) requires a description of each reserve within equity.

The reserve normally carries forward unchanged year after year. A company with a buyback some years ago should still see the balance on its balance sheet unless it has been capitalised or reduced. How it fits alongside retained earnings, share premium and revaluation reserves is covered in retained earnings and other reserves.

What can the reserve be used for?

Bonus shares. Section 733(5) lets the company use the reserve to pay up new shares allotted to members as fully paid bonus shares. The process is in bonus issues.
A later payment out of capital. Where a private company’s permissible capital payment exceeds the nominal value of the shares it buys, section 734(3) allows the excess to be charged against the capital redemption reserve, share premium account, fully paid share capital or unrealised profits in a revaluation reserve. Case 4 above could use an existing reserve this way.

Beyond those, section 733(6) applies the rules on reduction of share capital to the reserve. It cannot be used to pay a dividend, and it is not available to absorb losses without a formal reduction. Unlike the share premium account under section 610(2), there is no provision allowing it to absorb share issue expenses.

Can the reserve be removed?

Yes, by reducing it as if it were share capital under section 641. A private company limited by shares may do so by special resolution supported by a solvency statement; any company may do so by special resolution confirmed by the court. The solvency statement must be made not more than 15 days before the resolution is passed (section 642(1)(a)), and each director must form the opinions set out in section 643 after taking into account all liabilities, including contingent and prospective ones. A director who makes the statement without reasonable grounds commits an offence if it is delivered to the registrar (section 643(4)).

Article 3 of the Companies (Reduction of Share Capital) Order 2008 treats a reserve arising from a reduction supported by a solvency statement, or confirmed by the court unless the court orders otherwise, as a realised profit. Releasing a capital redemption reserve in this way can therefore create distributable reserves, for example to clear accumulated losses. The procedure and filings are in reduction of share capital.

What mistakes come up?

Transferring the purchase price, or the premium, instead of the nominal value.
Forgetting the reserve on a buyback out of capital under section 692(1ZA), or on cancelling treasury shares.
Creating a reserve when shares are bought into treasury, before any cancellation.
Bookkeeping software merging the reserve into retained earnings, which then overstates distributable profits in later years.
Treating the reserve as distributable after a sale or restructuring without a formal reduction.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.