Dividend in Specie on demerger

Dividend in Specie on demerger

Didn't find your answer?

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

Replies (2)

Please login or register to join the discussion.

By gbuckell
30th Jun 2015 11:02

Incomplete

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).

Thanks (0)
Replying to MDK45:
avatar
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.

 

Thanks (0)