Dividend from property revaluation reserve

Potential new client with prior year dividend paid from property revaluation reserve

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A potential new company client has approached us.  On looking at accounts at Companies House I can see that a significant 6-figure dividend was voted in the previous year.  There were significant negative P&L reserves in the previous year but these were offset by a significant property revaluation reserve giving positive net assets overall.  P&L reserves have been negative for many years previously with a revaluation reserve each year giving positive net assets overall.

On first sight it looks like the dividend has been paid purely on the strength of the revaluation reserve which I always thought was non-distributable although I haven't come across a case like this for years, if ever so maybe things have changed.

Is it ok to pay the dividend on the strength of the revaluation reserve?

Replies (8)

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By David Ex
20th Dec 2023 09:31
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Replying to David Ex:
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By MC1
20th Dec 2023 09:54

Thank you. I will give that a full read

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By Duggimon
20th Dec 2023 09:33

Was the distribution actually debited from the revaluation reserve or was it debited from the already negative P&L reserve?

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Replying to Duggimon:
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By MC1
20th Dec 2023 10:01

The note in the accounts actually shows a 3 column table, retained earnings, revaluation reserve and total. It clearly shows as being debited from the already negative retained earnings reserve.
Extract from accounts, (slightly rounded and altered a bit of course)
Retained earnings column:
B/f £(608,000)
Profit for year £20,000
Dividends £(150,000)
C/f £(738,000)

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By frankfx
20th Dec 2023 11:38

More Illumination?

https://stevecollings.co.uk/property-valuations-under-frs-102-2/

Please share with us your conclusions.
Dividend ... why not ask prospective client to share the board minutes (!!??) supporting the ultra vires dividend.

Ultra Vires distribution will require the directors to acknowledge and rectify.
HMRC may seek to treat the dividend as a loan to participator.
which should have been reported on CT return.
PAYE benefit in kind arises too.

Tangled up in Blue, Sir Walter Scott!

Please share with us your views on how you would address corrections required and how you would break news to the new client.

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By frankfx
20th Dec 2023 11:52

https://www.iris.co.uk/blog/misc/frs-102-ending-confusion-about-non-dist...

Iris have a useful and practical example on " best financial practice".

Client may welcome sight of such an example and to understand your point of reference.

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By Bobbo
20th Dec 2023 13:59

I would consider if the revaluation reserve balance is correct. A revaluation reserve generally exists for a profit which is unrealised and therefore not available for distribution (though you can of course have unrealised profits within retained earnings).

Is it possible the property to which the revaluation reserve represented was previously sold and such profit now realised but the previous accountants failed to transfer the balance on the reserve to retained earnings?

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Replying to Bobbo:
paddle steamer
By DJKL
20th Dec 2023 14:11

If fixed asset note has current value and note of historic cost it is an easy check (I certainly do this in our accounts) Deferred Tax figure also gives a clue)

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