Tax mysteries surrounding distributions from companies limited by guarantee
30th January 2026
Posted in Articles by Andrew Marr
Companies which are limited by guarantee do not have shareholders and instead have members who act as guarantors. These kinds of companies are often used for charitable activities or members’ clubs (such as golf clubs). Although the taxation of the entities themselves are relatively well understood, there is very little commentary around how distributions to members should be taxed. This is probably due to the fact that distributions to members are usually forbidden because surplus funds generally need to be used for the good of the club. However, this is not always the case and there are many stories of members’ clubs who sell out to property developers and then share the windfall with the members.
There is a concept of mutual trading which broadly means that transactions with members are not taxable and so if a golf club (say) takes in more membership fees than its running costs for the year then this will not be taxable and the surplus must be used for the objectives of the club. However, not everything is tax-free and the sale of land and buildings will generally be subject to corporation tax because it will not usually fall into an exempt category (although the position could be different for charities).
That deals with the club’s tax affairs, but strange tax information vortex seems to arise when members ask how they should be taxed on distributions. For example, are these subject to income tax or should they be treated as capital gains?
Distributions
Section 383 ITTOIA 2005 clearly sets out that dividends and distributions are subject to income tax, and such distributions are thoroughly defined in CTA 2010 section 1000. This points us to section 1020 which determines that something is a distribution if assets or liabilities are transferred to members without consideration. Therefore, prima facie any distribution to members of a company limited by guarantee is subject to income tax as a distribution. ‘Normal’ shareholders of a limited company can take comfort from section 1,030 when a company is liquidated. This says that a distribution made in respect of share capital in a winding up is not a distribution. This does not help the members of a company limited by guarantee because there is no share capital. This means that any argument around members being subject to capital gains tax rather than income tax on a distribution will need to be more nuanced.
Forbes Dawson view
Given that valuable land transactions between property developers and members’ clubs are fairly common, it is surprising that there is not more commentary around how the members’ windfalls should be treated in the members’ hands. Perhaps a purposive view of the legislation would be appropriate to argue that if a company limited by guarantee is wound up in a manner similar to a limited company, then this should not be treated as a distribution under section 1030. It remains to be seen what HMRC’s view of this matter would be and perhaps it could be the useful subject of a non-statutory clearance letter. It may also be possible to argue that the payment to the members is in consideration of their claim for that surplus to be relinquished in which case section 1020 above would not apply and the members would be treated as disposing of a ‘chose in action’ for capital proceeds. We are offering a bottle of champagne to the first “Tax-Biter” who can provide clear legislative basis for not taxing such a distribution as income (and we will know that you have read to the end!)
