A capital redemption reserve replaces specified nominal share capital cancelled through a redemption or repurchase, subject to company law.
A capital redemption reserve (CRR) is a restricted equity reserve created when company law requires an amount to replace nominal share capital cancelled through a share redemption or repurchase. The transfer is based on the reduction in nominal capital under the governing rule, not automatically on the market price or total cash paid for the shares.
When a company cancels shares, issued share capital can fall. Some company-law systems require a corresponding transfer from distributable profits to a restricted reserve so that the cancellation does not release the same amount for ordinary distribution.
This is a capital-maintenance mechanism. It does not guarantee solvency, creditor repayment, or adequate liquidity. Those questions require separate analysis of assets, liabilities, cash flow, covenants, and the terms of the transaction.
Section 733 of the UK Companies Act 2006 provides a useful concrete example. If shares are redeemed or purchased wholly out of profits, the amount by which issued share capital is diminished must be transferred to the CRR.
For a transaction within that rule:
If eligible fresh-issue proceeds are applied and are less than the aggregate nominal value of shares redeemed or purchased, section 733 generally requires the difference:
Other statutory conditions and exceptions can change the result. The formula is not a substitute for applying the complete rule.
Assume a UK company purchases and cancels 100,000 shares with a nominal value of GBP 1 each. It pays GBP 4 per share, and the purchase is wholly out of distributable profits.
| Item | Calculation | Amount |
|---|---|---|
| Cash purchase price | 100,000 x GBP 4 | GBP 400,000 |
| Nominal share capital cancelled | 100,000 x GBP 1 | GBP 100,000 |
| CRR transfer | Reduction in nominal capital | GBP 100,000 |
The CRR transfer is GBP 100,000, not GBP 400,000. The additional GBP 300,000 paid above nominal value affects other accounts under the applicable legal and accounting treatment. The company also uses GBP 400,000 of cash, but no cash is deposited into the CRR merely because the accounting transfer is recorded.
Suppose the same cancelled shares have aggregate nominal value of GBP 100,000, but the company applies GBP 60,000 of qualifying fresh-issue proceeds to the purchase. Under the basic difference rule in section 733, the transfer would be GBP 40,000, subject to the transaction satisfying the section’s conditions and exceptions.
| Funding source | Nominal capital cancelled | Illustrative CRR transfer |
|---|---|---|
| Wholly out of profits | GBP 100,000 | GBP 100,000 |
| GBP 60,000 qualifying fresh-issue proceeds | GBP 100,000 | GBP 40,000 |
This comparison shows why the purchase price alone is not enough to calculate the reserve.
UK section 733 permits the CRR to pay up new shares allotted to members as fully paid bonus shares. Subject to that use, capital-reduction provisions apply as if the reserve were paid-up share capital. Other jurisdictions may use different terminology, triggers, calculations, and release rules.
In financial statements, look for the CRR within equity and reconcile it through the statement of changes in equity or reserve note. A clear reconciliation should identify the opening balance, transfer created by the transaction, permitted use or release, and closing balance.
This material is educational and is not legal, accounting, corporate-secretarial, tax, financing, or investment advice.