Dividends in specie

Q: What are the tax consequences for the company?

Chargeable gains. The company is treated as disposing of the asset at market value under sections 17 and 18 of the Taxation of Chargeable Gains Act 1992 (CG14530), so a gain can arise even though no cash is received. Within a group. CG45315 explains that a dividend in specie from a subsidiary to its UK parent is normally covered by the no gain, no loss rule in section 171, provided the asset stays within the UK tax net. Where the dividend is declared at book value, the excess of market value would be a distribution under section 1020 of CTA 2010, but section 1021 disapplies it in a group case. The parent has no chargeable gain on receiving the dividend. Group aspects are covered further in intra group transfers at undervalue. Property. For Stamp Duty Land Tax, the assumption of an existing debt is chargeable consideration (SDLTM04040). If a shareholder takes a property subject to a mortgage and becomes liable for it, SDLT can be due on the debt assumed even though the transfer is a dividend. See Stamp Duty Land Tax explained.

A dividend in specie pays shareholders with an asset, such as property, shares in a subsidiary or a debt, instead of cash. For company law, section 845 of the Companies Act 2006 measures the distribution by the asset’s book value, not its market value, and section 846 lets any revaluation surplus in that book value count as realised for the purpose. For tax, HMRC generally looks at market value: the shareholder is taxed on the value received and the company is treated as disposing of the asset at market value.

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How does a company declare a dividend in specie?

The power has to come from the articles. Under article 34 of the model articles for private companies, the company may, by ordinary resolution on the recommendation of the directors, decide to pay all or part of a dividend by transferring non cash assets of equivalent value, including shares or other securities in any company. The directors can fix the value of assets, make cash adjustments between shareholders and vest assets in trustees where difficulties arise. Under the model articles, then, a dividend in specie needs a shareholder resolution, and directors cannot pay one as an interim dividend on their own. Companies with bespoke articles should check what theirs allow.

How the dividend is framed affects stamp taxes. HMRC’s Stamp Taxes on Shares Manual at STSM021130 contrasts two cases:

The company declares a cash dividend and then agrees to satisfy it by transferring shares. The declaration creates a debt, and satisfying the debt with shares is chargeable consideration for stamp duty, measured by the debt released.
The company declares the shares themselves as the dividend, so shareholders never have a right to cash. There is normally no chargeable consideration and no stamp duty, although a market value rule for listed securities introduced on 29 October 2018 can apply where its conditions are met.

HMRC’s Company Taxation Manual at CTM15200 notes that a dividend in specie is usually declared in a given amount, commonly the book value of the asset, to be satisfied by its transfer. Where no amount is given, the dividend is taken to be the book value.

How much distributable profit does a dividend in specie need?

Section 845 applies where, at the time of the distribution, the company has profits available for distribution and could make the distribution, measured under the section, without breaching Part 23. The amount of the distribution is:

zero, if the consideration the company receives is not less than the asset’s book value;
otherwise, the amount by which book value exceeds any consideration.

Book value means the amount at which the asset is stated in the relevant accounts, or zero if it is not stated at any amount (section 845(4)). A true dividend in specie has no consideration, so the distribution equals the book value. Section 845(3) treats distributable profits as increased by any excess of consideration over book value, which is relevant to part paid transfers.

The ICAEW and ICAS guidance, TECH 02/17BL, adds an important condition at paragraph 2.9D: section 845 needs a positive balance of distributable profits immediately before the transfer, even if only 1p. A nil balance does not qualify. Section 851(2) applies the same measurement for the common law rules on distributions and returns of capital. However, paragraph 2.9FA warns that a transfer lawful under section 845 can still breach the common law, for example where spending on the asset after the relevant accounts date has increased its book value without any matching consideration.

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What does section 846 do with revaluation surpluses?

Section 846 provides that where part of the amount at which the distributed asset is stated in the relevant accounts is an unrealised profit, that profit is treated as realised for determining whether the distribution is lawful. TECH 02/17BL paragraph 2.9 illustrates this with an asset that cost £100 and is carried at £130, the £30 surplus sitting in revaluation reserve. Only £100 of other realised profits is needed, because the £30 surplus is treated as realised. If the surplus has been capitalised, for example by a bonus issue, it is no longer available and £130 of other realised profits would be needed.

The guidance also shows, in its Appendix 1, that revaluing an asset to market value immediately before distributing it produces the same position as distributing it at book value: the extra unrealised profit made available by section 846 is exactly offset by the larger distribution.

How is it shown in the accounts?

TECH 02/17BL paragraph 2.9H says FRS 102 has no specific rules on accounting for distributions in kind, but paragraph 22.18 requires disclosure of the fair value of non cash assets distributed, except where the assets are ultimately controlled by the same parties before and after the distribution. UK companies have almost always accounted at book value, although fair value with a profit on disposal has also been acceptable. Under IFRS, IFRIC 17 requires the distribution to be measured at fair value (paragraph 2.9J). Either way, the legal amount of the distribution is still fixed by section 845.

How is the shareholder taxed?

HMRC’s view at CTM15200 is that the dividend equals the amount declared. If the market value of the asset is greater, the excess is a further distribution under section 1000(1) of the Corporation Tax Act 2010, as explained at CTM15250. For an individual shareholder the combined effect is that dividend income is based on market value, taxed at the rates in dividend allowance and tax rates. CTM15250 also says the employment income position should be considered where the member is a director or employee.

For capital gains, CG14530 says the market value rule applies to a distribution of assets by a company to its shareholders, and the same figure is used as the shareholder’s acquisition cost.

What are the tax consequences for the company?

Chargeable gains. The company is treated as disposing of the asset at market value under sections 17 and 18 of the Taxation of Chargeable Gains Act 1992 (CG14530), so a gain can arise even though no cash is received.

Within a group. CG45315 explains that a dividend in specie from a subsidiary to its UK parent is normally covered by the no gain, no loss rule in section 171, provided the asset stays within the UK tax net. Where the dividend is declared at book value, the excess of market value would be a distribution under section 1020 of CTA 2010, but section 1021 disapplies it in a group case. The parent has no chargeable gain on receiving the dividend. Group aspects are covered further in intra group transfers at undervalue.

Property. For Stamp Duty Land Tax, the assumption of an existing debt is chargeable consideration (SDLTM04040). If a shareholder takes a property subject to a mortgage and becomes liable for it, SDLT can be due on the debt assumed even though the transfer is a dividend. See Stamp Duty Land Tax explained.

How might this work in practice?

Illustration only. A company owns a freehold office carried under the revaluation model at £200,000, made up of cost of £150,000 and a revaluation reserve of £50,000. Its market value is £260,000. Its last circulated accounts show other realised profits of £120,000. The sole shareholder wants the office transferred by dividend in specie, declared at book value.

Step	Amount
Distribution measured under section 845 (book value, no consideration)	£200,000
Other realised profits	£120,000
Revaluation surplus treated as realised under section 846	£50,000
Profits available for this distribution	£170,000

The company is £30,000 short, so the dividend would be unlawful. It would need at least £150,000 of other realised profits, perhaps shown by interim accounts. If it can pay, the shareholder is taxed on dividend income based on £260,000, and the company has a chargeable gain computed using £260,000 as proceeds.

What mistakes come up?

Declaring a cash dividend and then transferring shares to settle it, creating a stamp duty charge on the debt released.
Directors resolving to pay an interim dividend in specie when the articles require an ordinary resolution.
Testing lawfulness against market value instead of book value, or forgetting that section 845 needs a positive reserves balance.
Ignoring the company’s chargeable gain because no cash changed hands.
Transferring a mortgaged property without considering SDLT on the debt assumed.

The underlying reserves test is explained in distributable reserves under Part 23, and what happens when it fails in director liability for unlawful dividends.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.