1.2.5 Capital gains

For the reasons already explained in this Section, capital gains is incompatible with the principles of community shares. The scope for a shareholder in a society to make a capital gain is either restricted or removed by two main mechanisms, the nature of withdrawable share capital, and the asset lock.

Non-transferable withdrawable share capital cannot be sold or transferred to third parties, except under special conditions where the member has died and the rules of the society allow the shares to be transferred on the death of a member. Instead, withdrawable share capital can be withdrawn from the society, subject to terms and conditions (see Section 2.2.2). This will normally be at the paid-up value of the shares, although some societies have rules that allow them to discount the value of share capital under special circumstances.

Societies can issue transferable shares, which, at least in theory, could be subject to capital gains (or losses). Transferable shareholders can sell or transfer their shares at whatever price a purchaser agrees to pay. However, transferable share capital is outside of the scope of the Community Shares Unit for reasons explained elsewhere in the Handbook (see Section 2.2.3).  Charitable community benefit societies cannot issue transferable shares as this would breach charitable public benefit rules. 

A capital gain could also be achieved by shareholders if the society were able to distribute residual assets in the event of the society being dissolved, or converted into some other legal form. This is restricted or prevented by the society adopting an asset lock; a rule which prohibits the distribution of any residual assets to members. Asset locks can be voluntary, prescribed by law, or have some other form of statutory basis.

A community benefit society can have a voluntary asset lock, or it can have a statutory asset lock by becoming a prescribed community benefit society (see Section 2.4). A charitable community benefit society is subject to the same asset lock requirements that apply to all charities in the UK.

The position of co-operative societies is complex. Most co-operative societies have a voluntary asset lock that prevents the distribution of residual assets to members. But there is no statutory asset lock available for co-operative societies, or any other form of statutory asset lock provision.

The ICA Statement of Identity, Values and Principles says that “at least part of [that] capital is usually the common property of the co-operative” and that co-operatives should use some of their surpluses to set up “reserves, part of which at least would be indivisible”. This implies that co-operatives should normally have at least a partial asset lock. However there is nothing in society legislation to prevent a co-operative society from converting into a company, which in turn would enable it to distribute residual assets to members.

Whereas capital gains is incompatible with community shares, the growth in members’ shareholdings is a common occurrence in societies that credit share interest payments to members share accounts. This form of automatic reinvestment may be an important component in the capital liquidity provisions of a society (see Section 2.3).

 

 

If you have any questions or suggestions for new information you would like to find in the Handbook, contact the team by email at communityshares@uk.coop