How share capital can be claimed back, tax-free

Shareholders making use of London Registrars' support for business who started a company with a certain amount of share capital that is no longer necessary may be interested to learn whether they can take back some of their money without incurring a significant tax bill.

When you start a business that is to be run through a company, you have a choice of how to inject the necessary capital. Going for minimum share capital is one option, with the rest being provided as a loan. The reverse strategy, however, may be more suitable for riskier ventures. That way, in the event of the company failing and you losing some of your money, you can claim tax relief for your loss.

However, should the business become an established success to the point of your money no longer being needed, you might wish to take some of it back. Although your capital could obviously be claimed back if you simply sell your shares to the company or someone else, this has the downside of reducing your stake in the business. This makes both aforementioned methods unsuitable if you would simply like to take back money no longer required by the company.

An alternative means of taking back part of your original investment is to have the company cancel some of its share capital so that it can be repaid to you. Although a majority of other shareholders need to agree to any plan to repay share capital, it shouldn't be difficult to obtain such agreement. That's because each shareholder will be given a repayment in proportion to the number of shares they own, meaning that there will be no effect on the balance of power and voting rights.

In the event of share capital being repaid, HMRC doesn't treat the amount that you receive as a distribution - i.e. income - but instead as capital with capital gains tax (CGT) liability. However, only the increase in value is taxable, rather than the entire payment. This means that some of the original cost of the shares is allocated against the amount that you get back, leaving the balance chargeable to CGT.

However, to use the CGT formula, you will need to know what the share value is at the time of repayment. This makes it necessary to enlist a share valuer's services. Help may also be available from your accountant. You are able to repay share capital as frequently as you and your fellow shareholders wish, as long as it is affordable for your company.

Using the CGT formula on each occasion enables you to determine the amount of the payment that is taxable, meaning that you can cancel just enough shares to ensure that your CGT annual exemption - £11,000 for 2014/15 - covers the gain. The net effect will be the tax-free withdrawal of some of your company's growth in value. Contact London Registrars' support for business experts for more information about the CGT formula