Ken Moody highlights some confusion over what exactly are ‘distributions in specie’ and outlines some important tax implications.
I was asked a question recently about a transfer of shares between a 60% subsidiary to its holding company and whether this would be better structured as a dividend in specie or a distribution in specie. I was initially thrown by the question; surely, they are the same thing? Of course, from a corporation tax point of view, it makes little odds since what some of us still call ‘Schedule F’ income is exempted by (CTA 2009, s 931B).
What’s the Difference?
I then ‘got it’ that the reference to a ‘dividend in specie’ was to a dividend declared in cash which is satisfied by the transfer of an asset. This is permitted by Article 34 (‘Non-cash distributions’) of The Companies (Model Articles) Regulations 2008, by ordinary resolution of the company on the recommendation of its directors. A ‘distribution in specie’, on the other hand, consists of the transfer of an identified asset without first declaring a cash dividend. However, the two could (and probably do, in some instances) get confused. It may go against the grain of our tax and accountancy minds not to put a figure on the distribution, but this may defeat the object if the company resolution implies a cash alternative.
Company Law
There is, in fact, no need to do so because the amount of the distribution is for company law purposes defined by CA 2006, s 845 (‘Distributions in kind: determination of amount’). This was introduced following the decision in Aveling Barford Ltd v Perion Ltd [1989] BCLC 626, where it was decided that the transfer of an asset by a company which had no distributable reserves, for less than its market value, was an unlawful distribution. Under CA 2006, s 845, the sale, transfer, or other disposition of an asset for a consideration of less than its book value is treated as a distribution of the amount of the difference. Since a distribution in specie normally does not involve any consideration, the amount of the distribution is the book value. It goes without saying that for a company to make a distribution, whether in cash or in kind, requires sufficient distributable reserves to satisfy the amount of the distribution.
Tax Implications
The above comments take us right to the hub of the difference between a dividend in specie and a distribution in specie. Either the cash amount declared or the book value of the asset would be liable to income tax or corporation tax if either were applicable. However, the stamp taxes are based on the concept of ‘consideration’. A distribution in specie is regarded as a voluntary disposition for no consideration, which is therefore the answer to the question put to me, since the alternative of a dividend in specie would incur stamp duty at 0.5%. The distinction is perhaps even more important in a stamp duty land tax context, where getting it wrong could prove very costly! There are, of course, other tax implications of a company distribution involving the transfer of an asset. If the asset was a chargeable asset for CGT purposes (e.g., shares or property), the market value rule (TCGA 1992, s 17) would apply. In the above circumstances, although the two companies were not in a CGT group relationship, the substantial shareholdings exemption applied.
Practical Tip
From what has been said, it is essential that a dividend resolution for a distribution in specie should make no reference to a cash amount and should simply state that the named asset is to be transferred as a distribution in specie. As noted, any implication of entitlement to a cash amount could be argued to create a prior debt giving rise to consideration.