Dividend in Specie on demerger

Dividend in Specie on demerger

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I have recently taken on a limited company  client which was formed as a result of a demerger (Newco). Although I wasn't involved in the demerger itself, I have looked back through the information and established that the following took place:

The existing company (Oldco) had 5 shareholders (A,B,C ,D and E) and owned 5 investment properties. As the properties were originally gifted to the company the value of the properties in the accounts was more or less matched by a revaluation reserve. The objective was for 2 of the properties to end up in Newco (my client) owned by shareholders A & B with the remaning shareholders owning Oldco. Broadly, this was acheived as follows:

1. Newco was formed and issued "A" shares to A and B and "B" Shares to C, D and E in exchange for each of their shares in Oldco (so Newco now owned the entire share capital of Oldco)

2. 2 investment properties were transferred to Newco by way of a dividend in specie for the value of the properties (£500k)

3. B shares in Newco were cancelled, leaving shareholder A & B owning the entire share capital of Newco.

I'm trying to establish the correct book-keeping entries for the dividend in specie. Taking it literally it would be Dr Fixed Assets, CR Dividends received with £500k.This would mean that Newco has distributable reserves of £500k. Is this correct/permitted? or should the credit go to some sort of demerger reserve or revaluation reserve?

Help much appreciated

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By gbuckell
30th Jun 2015 11:02


You do not say but presumably the shares in Oldco were distributed to another Newco owned by the B shareholders in return for the cancelation of the B shares.

With regard to your specific question, the accounting treatment is correct but this depends on what treatment was adopted at step 1. Normally in a capital reduction demerger shares are issued with a nominal value equal to the market value of the target company. If this was done then the reserves generated at step 2 would need to be set against the investment in subsidiary.

On the other hand merger relief may have been used.  The key is that sufficient capital and/or reserves are required to fund the demerger distribution at step 3 (or the part of step 3 you do not mention).

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Replying to MDK45:
By broadsides
30th Jun 2015 13:21

Many thanks for your response.

From the (limited) paperwork I have it would appear that:

1. Yes, the shares in Oldco were distrubted to another Newco owend by B shareholders in return for the cancellation of the B share.

2. The Newco shares issued had a nominal value of £500 (oldco value about 1.5m). The tax clearance letter mentions that merger relief will be used.

Advice very much appreciated.


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