A capital contribution is money or another asset a shareholder puts into a company without receiving new shares and without any right to be repaid. UK company law has no special regime for it: HMRC’s Capital Gains Manual says a contribution to a UK company is in effect a gift, reported within distributable reserves, while a payment that can be repaid in any circumstances is a loan. ICAEW and ICAS guidance treats a gift from an owner as a realised profit if it is received as cash or other qualifying consideration, but for the shareholder it normally adds nothing to the capital gains base cost of the shares.

What is a capital contribution, and how is it different from buying shares or lending?

There are three ways a shareholder can put value into a company, and they have very different consequences.

Route What the shareholder gets Where it sits in the company
Subscription for shares New shares Share capital and share premium, which cannot be distributed
Loan A debt the company must repay A liability
Capital contribution Nothing directly, only a more valuable company A reserve within equity

HMRC’s guidance at CG43500 notes that capital contributions are a familiar feature of some overseas company law, notably in the USA, but are not recognised under UK company law. If a payment is not made under the terms of a share issue, it is either a loan or a gift. Because no shares are allotted, none of the allotment formalities apply, including the return of allotment that section 555 of the Companies Act 2006 requires within one month of an allotment. That simplicity is attractive, but it is also why the paperwork needs to make clear that the money is a gift and not a loan. HMRC says it will look for evidence, such as the accounting treatment, and that any possibility of repayment points to a loan within the loan relationships rules. Where shares are wanted instead, see allotting shares.

Is a capital contribution distributable?

Often yes, which surprises people who expect it to behave like share premium. The ICAEW and ICAS guidance on realised and distributable profits, TECH 02/17BL, treats “gratuitous contributions of assets from owners in their capacity as such” as profits as a matter of law (paragraph 3.8). Paragraph 3.14(c) then says a gift such as a capital contribution is a realised profit if it is received in the form of qualifying consideration. Qualifying consideration, defined in paragraph 3.11, includes:

  • cash;
  • an asset readily convertible to cash;
  • the release, settlement or assumption by another party of a liability of the company, such as a shareholder writing off a loan owed to them;
  • a receivable the debtor can and is expected to settle within a reasonable period.

Three limits apply. First, paragraph 3.14(c) excludes cases where the legal form is a loan even though the accounts show a capital contribution, as happens with interest free loans (see below). Second, a contribution of a non cash asset that is not readily convertible to cash, such as property, gives an unrealised profit. The guidance’s “top slicing” rule in paragraph 3.18A nets any liabilities taken on against the qualifying consideration: its example is a contribution of investment property of £100,000 and cash of £50,000 together with a bank loan of £70,000, where none of the £80,000 profit is realised because net qualifying consideration is negative. Third, the linkage principle in paragraph 3.5 looks at arrangements as a whole, so money that goes in as a contribution and comes straight back out is not a realised profit in substance.

How is it shown in the accounts?

Contributions from owners are not income under FRS 102 or IFRS, so they do not go through profit and loss. They are credited directly to equity, usually in a separately named reserve so the company can track it. TECH 02/17BL paragraph 9.50 describes the entries for a parent and subsidiary: the subsidiary credits equity with the capital contribution and the parent debits the cost of its investment in the subsidiary.

That example concerns an interest free loan from a parent that is not repayable on demand. The loan is recorded at the present value of its future cash flows at a market rate, and the difference from the cash advanced is a capital contribution. Paragraph 9.53 says that credit is not a realised profit, because its legal form is a loan, and paragraph 9.54 says the interest charged as the discount unwinds eliminates it over the life of the loan. Director and shareholder loans on similar terms are covered in directors’ loans under FRS 102.

What is the corporation tax position for the company?

The answer depends on what is contributed.

Waiver of a shareholder loan. The company is the debtor under a loan relationship, so the credit from the release is normally brought into account for corporation tax. HMRC’s Corporate Finance Manual at CFM33180 lists the exceptions, conditions A to E, which cover statutory insolvency arrangements, debt for equity swaps, certain insolvency conditions where the parties are not connected, Banking Act stabilisation and corporate rescues. Separately, section 358 of the Corporation Tax Act 2009 excludes the credit on release of a connected companies relationship. Section 348 defines that as a debt where another company stands as creditor, so it can help where a parent company waives a loan to its subsidiary but not where an individual shareholder waives a director’s loan account.

Can the shareholder claim the contribution as a cost when selling the shares?

Generally not. HMRC’s view at CG43500 is that if a contribution is made as part of the terms of a share issue it counts as consideration for the shares under section 38(1)(a) of the Taxation of Chargeable Gains Act 1992. A contribution made outside a share issue does not represent expenditure on the shares or enhancement expenditure reflected in their state or nature under section 38(1)(b). HMRC relies on the Special Commissioners’ decision in the Fenston Will Trusts case. A shareholder who contributes £100,000 and later sells the shares may therefore have no deduction for that £100,000. Subscribing for new shares at a premium avoids this, at the cost of locking the money into share capital and share premium.

Can a capital contribution be paid back?

Not as a repayment. Because it is not a debt, any return of the money has to go out as a distribution, which needs distributable profits and the normal dividend procedure. Under article 30(3) of the model articles for private companies, a dividend must be paid in accordance with shareholders’ respective rights, so a contribution made by one of several shareholders cannot simply be handed back to that person. TECH 02/17BL paragraph 9.34 adds that where a contribution is returned to a donor company in linked circumstances, the return is not a realised profit in the donor’s hands. If the money needs to come back to one person, a loan is usually the better structure from the start.

How might this work in practice?

Illustration only. Sam owns all the shares in a trading company with accumulated realised losses of £40,000. Sam’s director’s loan account shows £50,000 owed to Sam by the company. Sam is considering two options to tidy up the balance sheet.

  • Waive the loan as a capital contribution. The release of a company liability is qualifying consideration, so the company records a £50,000 realised profit in equity and moves to distributable reserves of £10,000. But Sam is an individual, so the connected companies exclusion in section 358 does not apply, and unless another exception in CFM33180 applies, the release credit may be taxable for the company. Sam also gets no capital gains deduction for the £50,000.
  • Capitalise the loan into new shares. The debt is released in consideration of shares, which may fall within condition B (debt for equity swaps, explained at CFM33200). The £50,000 becomes share capital and share premium, so the deficit stays and the money cannot later be paid out as a dividend.

The right answer depends on whether Sam’s priority is restoring distributable reserves or keeping the release outside the corporation tax charge.

What mistakes come up?

  • Recording an advance as a contribution with no written evidence, so HMRC or a liquidator treats it as a loan, or the other way round.
  • Assuming the contribution reserve is non distributable like share premium, or assuming it is always distributable even when the asset contributed was property.
  • Waiving a director’s loan account without checking the loan relationships position.
  • Expecting the contribution to increase the shareholder’s capital gains base cost.
  • Promising one shareholder their contribution back when the articles require dividends to follow share rights.

Related topics: directors’ loan accounts, distributable reserves and how ICAEW and ICAS decide what counts as realised in realised and distributable profits guidance.

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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.