A company may distribute assets to its shareholders ‘in specie’ if its articles of association permit and the tax consequences for the shareholders are similar in principle to those applicable to a cash dividend. But there are a few ‘twists’ that need to be considered both from company law and tax perspectives, as Ken Moody explains.
Most company articles provide that a resolution of the shareholders declaring a dividend may, upon the recommendation of the directors, direct that it should be satisfied wholly or partly by a distribution of assets (Article 34 of the CA 2006 model articles of a limited company refers).
As for any company distribution (other than a capital distribution in winding-up) the company must have sufficient distributable reserves to make a lawful distribution in specie. But what is the value of the distribution? In Aveling Barford Ltd v Perion Ltd [1989] 5 BCLC 626, ABL had sold land to PL (a company under common control) at an undervalue when ABL had negative reserves. It was held that the sale was a disguised distribution which, as ABL had negative reserves, amounted to an unauthorised return of capital, which is unlawful. A distribution in specie will usually be accounted for at its book value, which may be less than market value, but s 845 CA 2006 now makes it clear that where a company has distributable reserves there is no distribution where an asset is transferred at no less than book value. If the asset is transferred at less than book value the difference is a distribution. However, if the company does not have distributable profits the Aveling Barford decision would apply to the transfer of an asset at an undervalue.
The tax position is of course different. As far as the shareholder is concerned he is liable to income tax on the market value of the asset, while the company will realise a chargeable gain or loss again by reference to the asset’s market value.
Valuation is not a precise science and it may happen that a shareholder will acquire a property from the company for what was considered to be its market value based on a professional valuation, but a higher value is subsequently agreed with the District Valuer. In that case, the excess over the price paid would be a distribution. However, provided there was no tax avoidance motive HMRC will allow an ‘inadvertent’ distribution to be reversed either by the shareholder paying the amount of the undervalue to the company or by reversing the transaction completely i.e. by transfer back to the company (though that could have other tax implications e.g. SDLT).
A distribution of a building in specie is not liable to SDLT in principle as there is no consideration. However, it is vital that the shareholders’ resolution does not declare the distribution in terms of a monetary amount which is to be satisfied by the transfer of a property. In that case, the stated amount would be regarded as consideration given by the shareholder.
As noted earlier a distribution in specie in winding-up is considered to be a capital distribution in the same way as distributions in winding-up generally. A capital gain or loss would still arise in the company during the accounting period commencing on the liquidator’s appointment.
Practical Tip:
The Aveling Barford decision will mainly be relevant where a company has no distributable reserves but could also apply where a company with positive reserves transfers an asset for less than book value and the available reserves are less than the undervalue. Professional valuations are recommended where assets are distributed in specie and of course, it is essential to make sure that the dividend resolution is correctly expressed as described earlier. Finally, if assets are to be distributed in specie during winding-up but where e.g. trading losses are available for the period to the cessation of trading, it may be practicable for the shareholders to agree to buy the assets in order to utilise available reliefs, with the price to be satisfied out of liquidation distributions.
