What are dividends and distributions in specie? Dividends are cash payments to shareholders but distributions in specie are transferring physical or financial assets instead of cash. This allows companies, including private companies limited by shares, to give value to shareholders without reducing cash reserves, which is useful in tough market conditions.
In this article we will look at the concept of dividend and distribution in specie, the legal framework, requirements, types of assets, tax implications, accounting needs, practical examples, common issues and best practices for distributions in specie.
Key Points
- Dividends and distributions in specie allow companies to reward shareholders with non-cash assets without reducing cash reserves.
- Legal requirements including authorisation in company articles and proof of distributable reserves are key for distributions in specie.
- There is a legal obligation to comply with company law when making distributions in specie.
- Tax implications and professional advice are essential to get distributions in specie right.
Understanding Dividend and Distribution in Specie
Dividend and distribution in specie are two pivotal concepts in company law that enable private companies to distribute non-cash assets to shareholders instead of paying a cash dividend. A dividend in specie involves a company transferring an asset to shareholders as an alternative to a cash dividend. On the other hand, a distribution in specie refers to the transfer of an identified non-cash asset to shareholders. Both methods are governed by Part 23 of the Companies Act 2006, which mandates that companies must have sufficient distributable reserves to cover the value of the asset being transferred. This legal framework ensures that the company remains solvent and that the distribution is fair and transparent.
Dividend and Distribution in Specie
Dividends and distributions in specie are two of the corporate finance tools. A traditional cash dividend is cash to shareholders, a distribution in specie is transferring physical or financial assets. This gives tangible value to shareholders without reducing the company’s cash reserves.
Why would a company do a distribution in specie? One reason is to avoid selling assets for cash in tough market conditions. This maintains asset value and gives shareholders a fair share of the company’s wealth.
Whether it’s property, machinery or financial instruments, most commonly such assets are distributed as a way to manage resources and reward shareholders.
Legal Framework for Distributions
The legal framework for distributions in specie is set out in Part 23 of the Companies Act 2006. This requires the company’s articles to authorise the transfer of non-cash assets and all documentation to be kept for compliance purposes. This ensures the distribution is transparent and legal.
Failure to comply with these regulations can have severe legal consequences. Asset transfer during such distributions must comply with regulations around distributable reserves and the book value of the assets involved. Getting a fair market value of the distributed assets is key to avoid disputes and to get the distribution right.
Companies must be careful to avoid any potential liabilities under company law.
Requirements for Distribution and Shareholder Approval
For a distribution to be legal the company must report that its distributable reserves are greater than zero. This is a key requirement as it ensures the company has enough resources to cover the value of the assets being distributed. Directors must not allow the value of non-cash assets to exceed the company’s distributable reserves.
The company’s articles of association must also authorise distributions in specie. Shareholder approval is not required unless it’s a material asset transaction. Meeting these conditions is key to a smooth distribution. Additionally, declaring a distribution in specie can be tax-efficient because the absence of actual consideration in the transfer means that Stamp Duty Land Tax is not applicable.
Types of Non-Cash Assets for Distributions
Distributions in specie can be of non-cash assets. Physical assets like property and machinery are the most common type of assets. These tangible assets give shareholders valuable resources that can be used or sold as needed.
Financial assets like stocks and bonds are also part of non-cash distributions. Companies can transfer assets as part of a lawful distribution, ensuring the consideration received matches the book value. Inventory can also be distributed, non-liquid assets that still have value. Transferring non-cash assets allows companies to manage resources and give shareholders different forms of wealth.
Substantial Property Transactions
A substantial property transaction involves the transfer of a significant asset, such as property or machinery, from a company to its shareholders. In the context of a distribution in specie, a substantial property transaction may occur if the asset being transferred holds considerable value.
According to section 190 of the Companies Act 2006, companies must obtain shareholder approval for substantial property transactions to ensure transparency and fairness. However, there are exceptions to this requirement, such as when the transfer is made during a solvent liquidation. Ensuring compliance with these legal requirements is crucial to avoid potential disputes and legal consequences.
Tax implications of Dividend in Specie
The tax implications of dividend in specie are complex and affect both the distributing company and its shareholders. Understanding these implications is key to compliance and tax efficiency.
Corporation Tax on Chargeable Gains
Corporation tax applies when the value of an asset exceeds its book value. This is a taxable event for the company, calculated as the difference between the market value at transfer and the purchase cost. This tax liability must be included in the company’s financial planning.
But there are tax reliefs available, like rollover relief, that can reduce some of these tax charges. Understanding these tax implications is key to making informed decisions on distributions in specie.
SDLT/LBTT/LTT Avoidance
A big advantage of declaring dividends in specie is that it allows avoidance of certain taxes. These are SDLT, LBTT and LTT charges. This is possible when no consideration is exchanged, so it’s a tax efficient way of transferring property.
Shareholder Tax
Shareholders are taxed on the market value of non-cash assets received in an in specie distribution. This affects their overall tax liability as these assets are treated as income based on their market value at the time of receipt.
Accounting and Disclosure Requirements
Proper documentation is key to make distributions in specie legal and to avoid disputes. Companies must comply with accounting and disclosure requirements, including preparing a statement of changes in equity and filing annual accounts to reflect the distribution. Transparency is key to shareholder trust and compliance.
Informing shareholders of the type of assets distributed means transparency on the value of the assets. Accurate accounting using the book value of assets is required to show the true position of the company. Compliance with these is non negotiable for a smooth distribution.
Practical Examples and Situations
A company is financially challenged with no cash but many non-cash assets. Distributions in specie allows the company to settle liabilities and manage resources. This has been done by many companies and has yielded financial and operational benefits.
For example, when companies pay interim dividends in specie, the interim dividend should be recognised in its actual form when the asset is transferred. Informing shareholders of the type and value of the assets distributed is transparency and compliance.
Proper planning and professional help makes this process smooth and beneficial for all parties.
Common Problems and Solutions
A common problem in distributing in specie is having sufficient distributable reserves. Companies can settle liabilities by distributing an asset, especially when the loan account is overdrawn. Addressing these issues upfront will make the distribution smooth.
Engaging an independent valuer will determine the value of the asset. Consulting accountants and lawyers will ensure compliance and navigate the in specie distribution complexities.
How to Implement Distribution in Specie
Distributing in specie involves several best practices. Reviewing financial statements regularly will ensure sufficient distributable reserves for specie distributions. Transparency in distributions will maintain shareholder trust and compliance.
Make sure the articles of association allows for distribution of non-cash assets. Engaging an independent valuer will ensure assets are valued fairly for compliance and equal distribution.
Implementation Best Practice for Private Companies
Private companies aiming to implement a distribution in specie must adhere to best practices to ensure compliance with company law and tax regulations. Here are some key steps to follow:
- Review the Company’s Articles of Association: Ensure that the articles permit the distribution of non-cash assets.
- Ensure Sufficient Distributable Reserves: Verify that the company has enough distributable reserves to cover the value of the asset being transferred.
- Determine the Asset Value: Use an independent valuer if necessary to ascertain the fair market value of the asset.
- Obtain Shareholder Approval: If required, secure shareholder approval for the distribution in specie.
- Comply with Part 23 of the Companies Act 2006: Ensure that the distribution is made in accordance with the legal framework.
- Consider Tax Implications: Evaluate the potential tax benefits, such as deferring capital gains tax and avoiding SDLT, LBTT, and LTT charges.
- Seek Professional Advice: Consult with an insolvency practitioner or tax advisor to ensure full compliance with all relevant laws and regulations.
By following these best practice steps, private companies can implement a distribution in specie smoothly and efficiently, minimizing the risk of non-compliance with company law and tax regulations.
Professional Advice and Valuation
Professional advice is key to navigating in specie distributions. Consulting accountants and lawyers will clarify tax implications and ensure distributions align with company objectives. An independent valuer will provide an objective value of the asset required for compliance.
Before distributing in specie, consult accountants and lawyers to ensure compliance and make it smooth.
Conclusion
In summary, dividends and distributions in specie is a way to optimise company wealth. By knowing the legal frameworks, tax implications and best practices, companies can manage their resources better. Proper planning and professional help is key to navigating the complexities.
Whether you’re financially challenged or wanting to reward your shareholders, distributions in specie can be beneficial. Try this out for your company’s growth and stability.
FAQs
What is distribution in specie?
Distribution in specie means the allocation of physical or financial assets to shareholders instead of cash. This allows shareholders to receive the assets directly from the company.
What are the legal requirements for a valid distribution in specie?
A valid distribution in specie requires the company’s articles to allow for such distribution and there are sufficient distributable reserves. Compliance to these will be legal.
How does distribution in specie affect tax?
Distribution in specie can result to tax liabilities for both the company and shareholders, as the company will incur corporation tax on chargeable gains while shareholders will be taxed on the market value of the assets received. So it’s best to consider these tax implications before doing such distribution.
What are the non-cash assets that can be distributed in specie?
Non-cash assets that can be distributed in specie are property, machinery, financial instruments and inventory. These assets can be allocated directly to beneficiaries without the need to convert to cash.
Why get professional advice for distribution in specie?
Get professional advice for distribution in specie to ensure tax compliance and correct asset valuation so it aligns with your company’s objectives. Less legal risks and better decision making.
