Thinking of paying dividends in kind instead of cash? This process, dividend and distribution in specie, allows you to transfer non-cash assets like property or machinery to shareholders. This guide will cover the basics, legal requirements and benefits.
Summary
- Distribution in specie allows you to transfer non-cash assets to shareholders, keep cash flow and give tangible value.
- The Companies Act 2006 must be complied with for lawful distributions, you need to have sufficient distributable reserves and follow the company’s articles. The company’s articles must explicitly allow in-specie distributions, determine the authority for declaration and ensure compliance with statutory requirements in the Companies Act 2006.
- Tax implications must be considered, specie distributions can avoid some taxes but may create income tax liabilities for shareholders.
What is Dividend and Distribution in Specie
A distribution in specie is where a company distributes assets to shareholders in their actual form instead of cash. This is often referred to as a dividend in specie when a cash dividend is declared but fulfilled through asset transfer. This is particularly useful for private companies. They can avoid cash flow issues and keep shareholders happy by transferring non-cash assets.
Think of a company with substantial real estate but limited liquid cash. Instead of selling properties to pay interim dividends, the company can transfer these properties to shareholders. This not only keeps the company’s cash reserves but also gives shareholders tangible value. The practical uses and benefits of distribution in specie makes it a good option for companies to manage their assets.
By doing specie distributions companies can keep distributable reserves above zero, comply with the law and give shareholders tangible value. This gives flexibility in asset management, companies can distribute assets strategically without affecting cash flow.
Legal Framework: Companies Act 2006
The legal framework for distribution in specie is in the Companies Act 2006. Part 23 of this Act covers both dividend in specie and distribution in specie, to ensure it complies with company law. A company must have sufficient distributable reserves as per sections 845 and 846 to do these distributions lawfully.
A company must follow its articles of association which usually states the authority to declare dividend in specie. These articles ensure the distribution complies with the company’s legal obligations and statutory provisions. Proper documentation of the distribution is also important to avoid legal consequences.
A private company limited wants to distribute property to its shareholders. The company’s articles must explicitly allow such distribution and determine the authority for declaration, ensure compliance with statutory requirements in the Companies Act 2006. Check the company’s reserves to ensure compliance with the relevant sections of the Companies Act 2006. This strict compliance with company law not only ensures lawful distribution but also protects the company from legal disputes especially for companies preparing accounts.
Requirements for Lawful Distribution
For a distribution in specie to be lawful a company must show that its distributable reserves are above zero, meaning the distributable profits must cover the value of the assets. If not, the distribution is unlawful.
Shareholder approval is not required for distribution in specie but there are exceptions. For example a significant property transaction may require specific shareholder approval to ensure transparency and avoid disputes. Shareholders must also be informed of the nature and value of the distributed assets to maintain transparency and trust.
A company wants to distribute high value machinery to its shareholders. Directors must confirm the company’s distributable reserves are sufficient to cover the value of the machinery. They must also inform shareholders of the market value of the machinery and ensure the process follows the company’s articles. The company’s articles must explicitly allow such distributions, determine the authority for declaration and ensure compliance with statutory requirements in the Companies Act 2006. This planning and compliance will ensure a smooth distribution.
Non-Cash Assets in Specie Distribution
In specie distribution often involves transferring non-cash assets such as property, shares or dividends in their current form rather than cash. A distribution in specie is the transfer of an identified non-cash asset without first declaring an amount in cash. These non-cash distributions can be tangible and intangible assets, from real estate and machinery to shares and bonds. The choice of asset depends on the company’s resources and strategy.
For example a company may choose to transfer shares instead of selling them for cash. This is useful when the market is not favourable for selling assets. Common non-cash assets in specie distribution are inventory, real estate and most commonly such assets like financial assets such as stocks and bonds.
Transferring non-cash assets allows companies to avoid liquidation and preserve cash. This is especially useful when cash is limited but sufficient assets are available to meet the distribution obligation. Such practical asset transfer will keep the company financially stable while fulfilling the distribution to transfer assets.
Distribution in Specie: Key Points
When considering a distribution in specie private companies must consider the following key points to ensure a smooth distribution. Firstly the company’s articles of association must permit the distribution of non-cash assets. The company’s articles must explicitly allow such distributions, determine the authority for declaration and ensure compliance with statutory requirements in the Companies Act 2006. For example article 34 of the current ‘Model Articles’ for private companies includes provisions for such distributions.
Directors must also ensure the company has sufficient distributable reserves to cover the value of the asset being transferred. This means the value of the asset, at book value not market value, must not exceed the company’s available distributable profits. Compliance with Part 23 of the Companies Act 2006 must be followed to avoid any legal consequences.
Tax implications are another important point to consider. Shareholders receiving non-cash assets may be liable to tax on the value of the asset received which will impact their overall tax position. The company must also ensure the distribution does not qualify as a substantial property transaction which would require additional approvals and disclosures.
By considering these points private companies can manage their resources and comply with company law.
Dividend in Specie: Tax
When a private company distributes a dividend in specie the tax implications can be complex and far reaching. The market value of the non-cash assets being transferred is key to the tax treatment of the distribution.
A dividend in specie is generally treated as a taxable dividend for the shareholder and the company must account for the tax implications. This means the company may have to pay tax on the distribution and the shareholder may be liable to tax on the receipt of the dividend.
One of the key points is the substantial property transaction rules which apply when a company transfers assets to a shareholder or connected person. These rules will trigger a tax charge on the company and the shareholder may be liable to tax on receipt of the assets.
To avoid these tax implications private companies may consider a distribution in specie to transfer assets to shareholders. This will be tax efficient as the shareholder will only be liable to tax on the assets if they are sold or disposed of.
But tax implications of a dividend in specie or distribution in specie will depend on the company and its shareholders circumstances so private companies should seek professional advice to comply with all tax laws and regulations.
Tax Consequences and Benefits
Transferring non-cash assets by distribution in specie has tax implications that will affect the company and shareholders’ accounts. These tax implications will depend on the type of asset and market value at the time of transfer.
But done correctly specie distribution can give tax benefits such as deferring capital gains tax and avoiding SDLT, LBTT and LTT.
Corporation Tax on Chargeable Gains
When the market value of an asset is higher than its book value the company will have corporation tax on the chargeable gains. This tax is calculated on the difference between the asset’s market value at the time of transfer and its purchase cost. For example if a company distributes a property worth more than its book value the gain realised will trigger corporation tax on the excess value.
By understanding these tax implications companies can plan their distribution better. Taking into account the tax liabilities companies can plan to minimise the tax burden while meeting the distribution obligation.
Avoiding SDLT/LBTT/LTT Charges
One of the benefits of declaring a distribution as ‘in specie’ is the potential to avoid Stamp Duty Land Tax (SDLT), Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT) charges. To get this benefit the dividend must be declared as ‘in specie’.
For example a distribution of a building declared as ‘in specie’ is not liable to SDLT in principle because there is no actual consideration involved in the transfer. This tax efficient approach will reduce the financial burden of the company and its shareholders.
Shareholder Tax Liability
Shareholders receiving non-cash assets in specie distribution should be aware of their tax liability. The market value of the assets at the time of distribution will be the tax liability of the shareholders. For example if a shareholder receives a property as a dividend in specie the market value of that property will be his taxable income.
This tax treatment means that shareholders will have to account the received assets as part of their income which may affect their overall taxable income and tax obligations. Shareholders must understand these implications to manage their finances better and comply with tax regulations.
What to Do
Deciding to distribute in specie involves weighing up the pros and cons. On the plus side distributing non-cash assets can give tax benefits and the company can retain its cash reserves which is particularly useful in times of cash flow constraint.
But this method has its own set of challenges. The distribution will be subject to complex accounting and reporting requirements and the company must have sufficient distributable reserves to cover the value of the asset being transferred. Failure to meet these requirements will result to legal and financial issues.
To decide what to do companies should consult with their accountants and lawyers. These professionals can give valuable advice on the legal and financial implications of a distribution in specie and ensure compliance with all relevant laws and regulations. Companies should also consider their own circumstances and their shareholders’ needs to make a informed decision.
Accounting and Reporting Requirements
Distributions in specie are subject to specific accounting and reporting requirements which must be followed strictly. The company must recognise the distribution in its accounts when the payment becomes a legal obligation. The value of the asset being transferred must be at its book value to ensure accurate reporting.
The company must also disclose the distribution in the statement of changes in equity and provide details of the asset being transferred. Transparency is key to maintain shareholder trust and compliance with regulations.
Additionally the company must comply with the Companies Act 2006 including preparing a statement of capital and filing annual accounts with the Registrar of Companies. Talking to the company’s accountants and lawyers will give guidance on these requirements and avoid legal issues.
Practical Examples and Scenarios
In practical scenarios distribution in specie can be a useful tool for companies with specific financial problems. For example a director with an overdrawn loan account can pay themselves back by distributing that as an asset. This will settle the company’s liability and tax benefits. Private companies limited by shares often use distribution in specie to manage their assets.
Another common scenario is companies with limited cash but plenty of non-cash assets. By distributing in specie they can meet their distribution obligation without straining their cash resources. Professional advice will help to clarify the tax implications and ensure the distribution is aligned with the company’s goals.
Common Issues and Solutions
Private companies may face several issues when distributing in specie. One common issue is ensuring the company has sufficient distributable reserves to cover the value of the asset being transferred. To address this companies should review their financial statements regularly and ensure they have sufficient retained profits to support the distribution.
Another issue is to determine the value of the asset being transferred. Engaging an independent valuer will help to determine the book value of the asset and provide an objective assessment to ensure compliance with the legal requirements. Companies should also talk to their accountants and lawyers to navigate the process and ensure compliance with all relevant laws and regulations.
By addressing these issues upfront companies can make a smooth and legal distribution in specie.
How to distribute in specie
A distribution in specie starts by identifying the non-cash assets to be distributed. Directors must ensure the total value of these assets does not exceed the company’s distributable reserves. This is for legal compliance and smooth distribution. The assets must be transferred at the same value as their book value.
Once the assets are identified the company must confirm it has sufficient distributable reserves to cover their value. Proper planning and assessment is required to avoid unlawful distribution.
The final step is to transfer the assets to the shareholders which must be properly documented to avoid legal issues. Follow these steps and you will have specie distribution, legal compliance and happy shareholders.
Implementation Best Practice
To make a successful distribution in specie private companies should follow these implementation best practice. Firstly the company must confirm the articles allow the distribution of non-cash assets and the directors have the authority to make such distributions. The articles must specifically allow for such distributions, declare the authority and ensure compliance with the statutory requirements in the Companies Act 2006.
Then the company must determine the value of the asset being transferred, use an independent valuer if required. This will ensure the asset is valued correctly and the distribution is fair and legal. The company must also ensure it has sufficient distributable reserves to cover the value of the asset being transferred.
Compliance with all relevant accounting and reporting requirements is also important. This includes preparing a statement of changes in equity and filing annual accounts with the Registrar of Companies. This will ensure transparency and legal compliance.
Last of all talk to accountants and lawyers to navigate the complexities of a distribution in specie. They will provide you with valuable advice and ensure the distribution is made in accordance with Part 23 of the Companies Act 2006 and protect the company and its shareholders.
By following these best practice private companies can make a distribution in specie and add value to the shareholders while maintaining financial stability and legal compliance.
Professional Advice and Valuation
You must consult an insolvency practitioner before you do a distribution in specie. They will help you understand the current regulations and ensure compliance in the process. They will also determine the fair market value of the distributed assets.
Valuation is important for fairness and legal compliance. Professional valuations will ensure the assets are valued correctly and avoid penalties for unlawful distribution. For example professional valuations will value high value art or collectible items being distributed by a company.
Seek professional advice and you will be compliant and have peace of mind for the company and its shareholders. It will help you navigate the distribution and get the best outcome for all parties.
Distribution and distribution in specie requires knowledge of the legal framework, key requirements, tax implications and practical examples. By following these you can manage your assets, preserve cash and add value to the shareholders.
In short, proper planning and execution of specie distribution with professional advice will give you big financial and operational benefits. Whether you are a business owner or a shareholder you will benefit from this.
Conclusion and Next Steps
In summary, dividend in specie and distribution in specie are company law concepts that require detail. Private companies must ensure they comply with all relevant laws and regulations when distributing non-cash assets to shareholders.
To be compliant private companies should:
- Review their articles to confirm they are allowed to pay dividends in specie or make distributions in specie.
- Ensure they have sufficient distributable reserves to cover the distribution.
- Consider the tax implications of the distribution and seek professional advice if required.
- Keep records of the distribution, including the value of the assets transferred and tax implications.
By following these you will be compliant with all relevant laws and regulations when distributing non-cash assets to shareholders. Professional advice is also important to ensure the distribution is company law and tax compliant.
For next steps private companies should:
- Review their financial statements to ensure they are correct.
- Consider the impact on their financial position and cash flow.
- Comply with all relevant reporting requirements, file the necessary paperwork with the relevant authorities.
- Seek professional advice to ensure you are meeting all your company law and tax obligations.
By following these you will be compliant with all relevant laws and regulations when distributing non-cash assets to shareholders and avoid penalties or fines.
FAQs
What is distribution in specie?
Distribution in specie is the distribution of non-cash assets by a company to its shareholders without converting those assets into cash first. Shareholders get the assets not the cash equivalent.
What law governs distribution in specie?
Distribution in specie is governed by Part 23 of the Companies Act 2006 which covers this. Follow this and you will be compliant and distribution will be proper.
How can a company avoid SDLT when transferring property?
A company can avoid SDLT when transferring property by declaring the dividend as ‘in specie’. This will make the transaction SDLT free.
What if the market value of an asset is higher than its book value?
If the market value of an asset is higher than its book value the company will pay corporation tax on the gains made. This needs to be planned properly.
Why is valuation important?
Valuation is important in distribution in specie so the assets are valued at market value and compliance and fairness to the recipients. No disputes and equal distribution.
