How distributions in specie impact capital allowances

Group reorganisations are a routine part of corporate life. They may be driven by refinancing, simplification, strategic realignment or plans for investment or sale. Often, these changes will involve moving property from a subsidiary to its parent company. A common way to do this is through a distribution in specie, where a subsidiary transfers an asset directly to another group company.

Because transfers of capital assets within a group are usually covered by the no gain, no loss rules, it is easy to assume that the transaction is tax neutral. However, while no chargeable gain arises, the no gain, no loss rules do not remove all tax consequences. The area most likely to create an unexpected tax charge is capital allowances.

This article explains why distributions in specie can create unplanned tax liabilities. It also sets out the key capital allowances rules that apply and the steps businesses should consider before transferring property as part of a reorganisation.

What is a distribution in specie?

A distribution in specie (sometimes called a distribution in kind) is a non‑cash dividend. Instead of paying a monetary amount, a company distributes an asset (such as land, buildings, IP or equipment) to a shareholder or another group entity.

Key features:

• It is treated as a disposal by the company making the distribution
• For capital gains purposes within a group, it is covered by no gain, no loss
• For capital allowances, however, the disposal rules still apply and this is where unexpected tax charges arise

Why property transfers via distribution in specie create capital allowances issues

Although a distribution in specie is treated as a disposal for tax purposes, it is not treated as a sale when looking at capital allowances. This difference matters because it stops businesses from using the normal rules that apply when a property is sold in a commercial transaction in relation to any fixtures that are part of the property.

Disposal value must be market value

Regardless of the actual value set for the distribution in specie, under section 196 of the Capital Allowances Act 2001, the disposal value for capital allowances purposes is the market value of the property fixtures at the time of transfer. This also applies to the fixtures – items built into the property, such as lifts, heating systems, electrical installations and other types of plant and machinery physically attached to the building.

Two key consequences follow:

1. No s.198 election is available
   When a property is sold, the buyer and seller can agree a section 198 election. This fixes the value of fixtures for capital allowances and helps both parties manage the tax outcome by choosing an agreed figure.

   However, a distribution in specie is not treated as a sale. This means a s.198 election cannot be used. As a result, businesses lose a helpful planning tool and have no flexibility to set a lower, agreed value for fixtures.

2. Fixtures must transfer at market value
   Without the option to agree a lower value for tax, all fixtures must be treated as transferred for tax purposes at their full market value. This often means the disposal value is higher than expected. This can have a significant impact for both the subsidiary parent company.

Impact on the subsidiary making the distribution in specie

The subsidiary that makes the distribution must treat the market value of the fixtures as disposal proceeds in its capital allowances pool. If the fixtures have already been largely or fully relieved, this usually creates a balancing charge. This can lead to an immediate increase in the subsidiary’s corporation tax bill.

The main reasons for undertaking a reorganisation are usually commercial, not tax based. Because of this, the extra corporation tax cost can come as an unwelcome surprise and may undermine the expected commercial benefits.

Impact on the parent company receiving assets via a distribution in specie

The parent company can claim capital allowances on the fixtures it receives. However, unlike when buying assets from a third party, the tax relief available is limited.

Because the asset is acquired from a related party, the parent company is not eligible for:

• Annual investment allowance
• Full expensing
• 50% first-year allowances
• Any other first-year allowances

This removes the possibility of accelerating relief that would have been available had the property been bought from a third party.

The parent’s capital allowances claims are limited to writing down allowances (WDAs) at:

• 14% for main pool assets (from 1 April 2026)
• 6% for special rate assets

These rates spread relief over many years, often decades for special rate pool fixtures.

The resulting mismatch

This creates a timing imbalance:

•  The subsidiary experiences an immediate balancing charge
• The parent obtains only gradual relief over future periods

The net effect is usually a real tax cost to the group, even though the transaction is entirely internal and generates no commercial profit.

More complex scenarios involving distributions in specie

The position can become even harder to navigate in more complex reorganisations, especially when a distribution in specie is combined with a sale and leaseback arrangement. In these cases, the capital allowances rules can apply in a far more restrictive way. Extra conditions may also apply, including anti‑avoidance rules designed to prevent attempts to manipulate tax relief.

Because of these added layers of complexity, specialist advice is essential. This helps ensure that future capital allowances claims are not restricted by mistake and prevents any extra tax liabilities from being triggered.

Practical takeaway: early capital allowances review is essential

Distributions in specie are commonly used for genuine commercial reasons. However, the capital allowances impact is often overlooked. Before transferring property within a group, whether as part of a simplification, refinancing, demerger, acquisition structure or sale preparation, businesses should:

• Assess the fixtures position early
• Obtain a market value apportionment where required
• Estimate potential balancing charges
• Review future allowances available to the receiving company
• Consider alternative transfer routes where appropriate

A relatively small amount of planning can prevent a substantial and unexpected corporation tax bill.

Need specialist advice?

If you are considering or have already carried out a distribution in specie involving property, particularly as part of a wider reorganisation, it is critical to consider the potential capital allowances impact.

For advice, please get in touch with Heather Britton or Jon Watson in our capital allowances team.