When a company transfers an asset, service or other benefit to its parent or a fellow subsidiary for less than it is worth, the shortfall can be a distribution in law, whatever the transaction is called and even if the accounts show no loss. A distribution is lawful only if the transferring company has distributable profits to cover it, measured under section 845 of the Companies Act 2006, so a company with a deficit on reserves cannot make even a small one. The safest routes are to transfer at or above book value from a company with positive realised reserves, or to transact at a properly evidenced market price.

Why can a sale to another group company be a distribution?

Section 829 defines a distribution as every description of distribution of a company’s assets to its members, whether in cash or otherwise, subject to listed exceptions such as bonus issues and capital reductions. It is not limited to dividends.

The ICAEW and ICAS guidance, TECH 02/17BL, explains the case law at paragraph 2.6A. The label put on a transaction does not decide it; its purpose and substance do. An undervalue transaction with a shareholder or sister company is capable of being a distribution because it contains an element of gift. The guidance draws on Aveling Barford Ltd v Perion Ltd, a case involving a sale at an undervalue between companies under common ownership, and on Progress Property Company Ltd v Moorgarth Group Ltd. In Progress Property, Lord Walker said the court’s task is to inquire into the true purpose and substance of the transaction, looking at whether the company was under financial pressure, what advice was taken, how the market was tested and how the terms were negotiated. A genuine arm’s length deal stands even if it later looks like a bad bargain; an improper attempt to extract value by the pretence of an arm’s length sale does not.

Paragraph 2.6B adds that nobody needs to have intended a distribution, or known it was one. The question is whether the intended substance of the deal is, regardless of its label, a distribution. Paragraph 9.70 notes that the same applies between companies under common ownership outside a formal group.

Which intra group transactions can be caught?

Paragraph 9.69 of TECH 02/17BL gives examples:

  • receiving less than value for an asset (property, shares in another subsidiary, intangible assets, receivables) transferred to a parent or fellow subsidiary;
  • overpaying for an asset received from a parent or fellow subsidiary;
  • providing services, such as management services or use of premises, for inadequate payment, or overpaying for services received;
  • guaranteeing a parent’s or fellow subsidiary’s debt without an appropriate fee;
  • a charitable donation of profits to a group charity;
  • buying or surrendering group relief for a sum that is not arm’s length;
  • transferring a pension scheme surplus or deficit for a sum that is not arm’s length.

Paragraph 2.6C adds the assumption of a liability owed to a third party without equal consideration. On loans, paragraph 9.62 says an interest free loan from a subsidiary to its parent is a distribution in law because it is at undervalue, paragraph 9.66 applies the same to above market interest paid to a parent, and paragraph 9.67 says an interest free loan repayable on demand can be a distribution if the borrower could not practicably repay. Guarantees raise separate corporate benefit questions, covered in intra group guarantees and corporate benefit.

How is the amount of the distribution measured?

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

  • zero if the consideration is not less than the asset’s book value in the relevant accounts;
  • otherwise, the excess of book value over the consideration.

Book value is zero where the asset is not in the accounts at all. Section 851(2) applies the same measurement to the common law rules, which removed the doubt Aveling Barford had created about the amount of a non cash distribution (TECH 02/17BL paragraph 2.9B). The full mechanics of section 845, and of section 846 for revalued assets, are in dividends in specie.

The practical result is generous to a company with reserves and harsh to one without. Appendix 1, example 1 of TECH 02/17BL: a company with distributable profits of £10,000 sells an asset to its parent for £20,000, equal to book value, when market value is £60,000. The distribution is nil and reserves stay at £10,000, so the transfer is lawful despite the £40,000 undervalue. In example 3, the same asset is sold for £15,000, giving a £5,000 distribution, which reserves cover.

But paragraph 2.9D says section 845 needs a positive balance of distributable profits immediately before the transfer, even 1p. Paragraph 9.68 is blunt: a subsidiary with no positive reserves that enters into any transaction involving a distribution, however small, acts unlawfully, even where the accounting distribution is nil. Paragraph 9.69 gives the example of transferring an internally generated intangible with no book value for nothing: it reduces no recorded net assets but is still unlawful if the company lacks distributable profits.

Can an intermediate holding company be affected?

Yes. Paragraph 9.71 considers a subsidiary that transfers an asset at undervalue to the ultimate parent. Even if the transfer is lawful for the subsidiary, the intermediate company between them sees the value of its investment fall. Its knowledge of and passive acquiescence in the transaction may make it, in law, a distribution by the intermediate company too, which is unlawful if that company lacks distributable profits. Each company in the chain needs its own reserves check, using its own individual accounts (paragraph 9.1).

Is the profit realised for the company that receives the asset?

Not necessarily. The linkage principle in paragraph 3.5 looks at the overall commercial effect. Paragraph 9.33 says a dividend in kind from a subsidiary is an unrealised profit for the parent unless the asset is qualifying consideration, such as cash. Paragraph 9.34A deals with an asset transferred for consideration followed by a waiver of the resulting intercompany debt as part of the same plan: the substance is a transfer for nothing, and the transferee’s profit on the waiver is not realised. How the guidance makes these calls is explained in realised and distributable profits guidance.

What are the consequences of getting it wrong?

Company law. Under section 847, a member who knew or had reasonable grounds to believe a distribution was unlawful must repay it, or for a non cash distribution pay its value. Directors who approved it face the claims described in director liability for unlawful dividends.

Insolvency. If the transferring company later enters administration or liquidation, section 238 of the Insolvency Act 1986 lets the office holder apply to reverse a transaction at an undervalue. The court will not make an order if the company acted in good faith for the purpose of its business and there were reasonable grounds to believe the transaction would benefit it.

Tax. HMRC’s guidance at CG45315 explains that an asset passed to a UK parent by a dividend in kind is normally within the no gain, no loss rule in section 171 of the Taxation of Chargeable Gains Act 1992, and that section 1021 of the Corporation Tax Act 2010 disapplies the section 1020 distribution charge on any excess of market value in a group case. The tax position can therefore be neutral while the company law position is unlawful.

How can a group avoid an unlawful distribution?

  1. Check the transferring company’s realised reserves in its own last circulated accounts, or prepare interim accounts under the relevant accounts rules.
  2. Make sure there is a positive balance before the transfer and that any shortfall below book value is covered.
  3. Where reserves are thin, transfer at or above book value, or obtain a valuation and transact at market value.
  4. Record how the price was set: advice taken, market testing and negotiation, which are the factors Lord Walker identified.
  5. Charge market rates for guarantees, services and intercompany loans, or check reserves first.
  6. Check intermediate holding companies in the chain as well as the two parties.

Illustration only. A subsidiary with an accumulated deficit of £2,000 transfers a customer list it built itself, with no book value, to its parent for no payment. The accounts record nothing, but under paragraph 9.69 this is still a distribution and, with no positive reserves, it is unlawful. A sale to the parent at a supportable market price would avoid the problem.

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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.