Peter Rayney examines the tax consequences of in-specie distributions.
Where a company makes an in-specie distribution – in effect makes a dividend consisting of an asset, the actual market value of that asset is generally treated as a taxable distribution in the hands of an individual shareholder. Unless the distribution is being made in the course of a winding-up (or some other form of relief applies, e.g. under the statutory demerger legislation), the market value of the relevant asset (less any consideration paid by the recipient) is taxed as income in the shareholder’s hands at the relevant dividend rate(s).
If the recipient shareholder is a UK resident company, the distribution will normally be exempt from corporation tax (see CTA 2009, s 931A). The value ascribed to the distribution in the accounts of the distributing company is irrelevant for tax purposes (see Part 1 of this article).
Liquidators may distribute assets to shareholders in the course of a winding-up. In these cases, the market value of the asset falls to be taxed in the shareholder’s hand as a capital distribution within TCGA 1992, s 122 (unless the ‘anti-phoenix’ legislation is in point). This is treated as a deemed disposal of an interest in shares for CGT purposes.
From the company’s viewpoint, the distribution of the asset triggers a disposal at market value for corporate capital gains purposes (TCGA 1992, s 17(1)).
Stamp duty land tax issues
Companies often distribute property in specie to their shareholders. Provided this is implemented correctly and no consideration is being given, no stamp duty land tax (SDLT) charge should arise. This is because the distribution is effectively a voluntary transfer for no consideration (FA 2013, Sch 3, para 1).
Importantly, FA 2013, s 54(4) provides that the ‘no consideration’ rule does not override the deemed market value rule in FA 2013, s 53(3) for transfers to connected companies. However, there is a potential trap in FA 2003, s 54(4)(b). This provides that an SDLT charge based on the market value of the property applies where the distributing company has previously received the relevant property from a fellow group member under the SDLT group relief provisions in the past three years.
The dividend resolution must not create any pre-existing debt and, therefore, must avoid reference to a monetary or cash amount. The danger is that HMRC could argue the property has been transferred in satisfaction of the debt, which would constitute chargeable consideration for SDLT purposes. The dividend resolution should, therefore, simply state that the relevant property is being transferred as a distribution in specie.
However, an SDLT charge arises where property is distributed in specie but the recipient shareholder assumes a debt/mortgage attaching to the property. In such cases, SDLT is based on the value of the debt/mortgage assumed (as opposed to the market value of the property). On the other hand, where the novated debt is owed to the recipient shareholder and the distribution is being made to them as part of a winding up, HMRC takes the view that there is no effective consideration and hence no SDLT is charged (see HMRC’s SDLT manual at SDLTM04043).
Practical tip:
When carrying out preparatory transactions before a demerger, it may be desirable for subsidiaries to transfer properties to the parent company as a distribution in specie. This avoids having to rely on the SDLT group relief provisions, which may prove ineffective due to the associated anti-avoidance and clawback provisions.
