Gifts by a company to shareholders and their families

A company that gives cash or assets to a shareholder for nothing is, in company law terms, usually making a distribution of its assets to a member. That is lawful only if the company has enough distributable profits to cover it, and a gift made without them can be an unlawful distribution or return of capital that the shareholder may have to repay. Gifts routed to a shareholder’s family raise the same question, judged on substance rather than labels.

Why can a gift to a shareholder be a distribution?

Section 829 of the Companies Act 2006 defines a distribution as every description of distribution of a company’s assets to its members, whether in cash or otherwise. The only exceptions are bonus issues, authorised reductions of capital, redemptions and purchases of own shares under Part 18, and distributions on a winding up. A gift to a member is none of those. If value leaves the company and goes to a member because they are a member, it is a distribution whatever it is called: a present, an ex gratia payment, a car handed over, or a holiday paid for.

Section 830 then says a company may only make a distribution out of profits available for the purpose, tested on the relevant accounts under section 836. So a gift needs the same reserves cover as a dividend. See distributable reserves.

What if the company has no distributable reserves?

Then the gift is a return of capital to the member that the Act does not permit. HMRC’s Company Taxation Manual at CTM15205 summarises the leading cases. In Aveling Barford v Perion, a transfer at undervalue by a company with no distributable profits was an unlawful return of capital. In Progress Property v Moorgarth [2010] UKSC 55, the Supreme Court held that whether a transaction is a distribution depends on its purpose and substance rather than its form, so a genuine commercial deal that turns out to be at an undervalue is not automatically caught, but a deliberate gift to a member is.

Section 851 preserves these common law rules alongside Part 23. For a gift of an asset, section 845 sets the amount of the distribution where the company has some distributable profits: it is the amount by which the asset’s book value exceeds any consideration. With no consideration, the distribution is the full book value, and reserves must cover it. If the company has no distributable profits at all, section 845 does not apply and the common law rule in Aveling Barford decides the matter. More detail on asset transfers is on dividends in specie and, for groups, intra group transfers at undervalue.

What about gifts to a shareholder’s family?

Part 23 speaks of distributions to members, so a payment to someone who is not a member is not automatically a distribution. Following Progress Property, though, the court looks at substance. A gift to a shareholder’s spouse or child that is really a way of passing company value to the shareholder’s family can be treated as a distribution to the shareholder, and is then unlawful if reserves do not cover it.

Even where it is not a distribution, a gift to a third party has to be justified under the directors’ duties. Section 171 requires directors to exercise powers only for the purposes for which they are conferred, and section 172 requires them to promote the success of the company for the benefit of its members as a whole. A gift to a relative of one shareholder rarely meets either test without the agreement of all the members, and it is never safe against creditors if the company is in difficulty.

Can a gift be challenged if the company later becomes insolvent?

Yes. Section 238 of the Insolvency Act 1986 lets an administrator or liquidator apply to court where the company entered into a transaction at an undervalue at a relevant time, and section 238(4)(a) expressly includes making a gift. Under section 240, for a person connected with the company the relevant time is the two years ending with the onset of insolvency, and the company is presumed to have been unable to pay its debts at the time, or to have become unable as a result, unless the contrary is shown. The court can order the position to be restored. See transactions at an undervalue.

How are gifts to shareholders taxed?

For corporation tax, section 1000(1)B of the Corporation Tax Act 2010 treats any distribution out of assets of the company in respect of shares, other than a repayment of capital or an amount matched by new consideration, as a distribution, and section 1020 treats the excess of a benefit received by a member on a transfer of assets over any consideration given as a distribution, valued at market value. That differs from company law, which uses book value under section 845.

For close companies, section 1064 treats expense on benefits or facilities for a participator as a distribution, and section 1069 extends this to associates of participators, which includes relatives. See benefits to participators treated as distributions. A close company that makes a transfer of value can also create an inheritance tax charge under section 94 of the Inheritance Tax Act 1984, apportioned among the participators; see close company transfers of value.

Where the shareholder also works for the company and the gift is given in that capacity, the answer may be different. HMRC’s guidance at SAIM5030 says the distribution rules apply where value passes to a member in their capacity as such, and that payments for services may instead be employment income. The test is why the gift was made, so the paperwork should say so.

How can a company make a gift to shareholders lawfully?

• Check the relevant accounts show distributable profits at least equal to the cash, or the book value of any asset given.
• Structure it as a dividend, or a dividend in specie for an asset. Model article 34 for private companies allows a non cash distribution by ordinary resolution on the directors’ recommendation, subject to the terms of issue of the shares.
• Make it in proportion to shareholdings within the class, or obtain every member’s agreement where that is not possible.
• If the recipient works for the business, decide whether it is really remuneration and run it through payroll or the benefits rules instead.
• If the company wants to dispose of an asset to a member or relative, consider a sale at market value; see company assets sold to directors.

How might this look in practice?

Illustration only. A company has distributable reserves of £5,000 on its last accounts. It transfers a van with a book value of £12,000 and a market value of £15,000 to the daughter of the 100% shareholder, for nothing.

• Treated in substance as a distribution to the shareholder, the company law amount is the £12,000 book value. Reserves of £5,000 do not cover it, so the transfer is unlawful as to at least £7,000, and on Aveling Barford principles possibly in full.
• For tax, the measure is market value, £15,000, through section 1064 read with section 1069 or the general distribution rules.
• If the company enters liquidation within two years, the liquidator can seek to reverse the gift under section 238.

What happens if a gift turns out to be unlawful?

Section 847 makes a member who knew or had reasonable grounds for believing that a distribution was unlawful liable to repay it, or for a non cash distribution to pay its value at the time. In an owner managed company the shareholder will usually be taken to know. The directors who authorised it may also be liable for breach of duty. The practical steps are on putting right an unlawful dividend.

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Related Accountapedia entries

• Shareholders’ agreements
• Nominee shareholders
• Directors as creditors of their insolvent company
• Protective trusts and their tax treatment
• Can shareholders demand an audit

Related cover: Directors and officers insurance. Ask for a quote or call 01795 841 310.

Sources

• legislation.gov.uk: Act 2006 c. 46, section 829
• legislation.gov.uk: Act 2006 c. 46, section 830
• legislation.gov.uk: Act 2006 c. 46, section 836
• GOV.UK: Manual page CTM15205
• legislation.gov.uk: Act 2006 c. 46, section 851
• legislation.gov.uk: Act 2006 c. 46, section 845
• legislation.gov.uk: Act 2006 c. 46, section 171
• legislation.gov.uk: Act 2006 c. 46, section 172
• legislation.gov.uk: Act 1986 c. 45, section 238
• legislation.gov.uk: Act 1986 c. 45, section 240

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.