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Capital profit (UK)


A profit arising from the realization, either in cash or in kind, of an asset not bought originally for resale in the course of business. A distinction is necessary between capital profits made by individuals and those made by companies. Although both are assessable to capital gains tax, there are additional points to note re the capital profits of limited companics governed by the Companies Acts.

At one time capital profits of companies could only be distributed in strictly defined circumstances. The position was changed and clarified by the 1980 Companies Act, which permitted the distribution of capital profits in the manner of revenue profits provided that those profits were both real and realized, had not been previously capitalized and remained after all accumulated realized capital losses had been accounted for. Public companies must also show that the additional conditions appropriate to distributable reserves of public companies are satisfied.
The changes introduced by the 1980 Companies Act go some way towards preventing the abuses of asset stripping whilst leaving intact the option all companies enjoy of using capital profits, whether realized or unrealized, to fund the issue of bonus shares, though not redeemable bonus shares, which would defeat the purpose of the legislation.


Reference: The Penguin Business Dictionary, 3rd edt.