Guide
Understand CIC asset lock rules
How the CIC asset lock protects community assets, when and how you can transfer assets, and dividend and interest caps that apply to Community Interest Companies.
The asset lock is the defining feature of a Community Interest Company. It ensures that a CIC's assets and profits are used for the benefit of the community, not for private gain. Unlike a voluntary asset lock in a standard company's articles, the CIC asset lock is statutory and permanent - it cannot be removed by members, directors, or any resolution.
This guide explains how the asset lock works in practice, what transfers are permitted, and how dividend and interest caps protect community assets while still allowing reasonable returns to investors.
Why the asset lock matters
The asset lock exists to give confidence to stakeholders - funders, beneficiaries, the public - that a CIC's resources will be used for their intended purpose. It prevents:
- Distribution of assets to members or shareholders beyond permitted limits
- Transfer of assets below market value to private individuals
- Extraction of value through excessive remuneration or payments
- Loss of community benefit on dissolution or conversion
Permitted asset transfers
The asset lock does not mean a CIC cannot dispose of assets - it controls how assets can be transferred. Understanding these rules is essential for day-to-day operations and strategic decisions.
Transfers at full market value
A CIC can sell any asset at its full market value, regardless of the buyer. The community benefit is preserved because the CIC receives equivalent value in return. Key considerations:
- Valuation evidence: For significant assets, obtain an independent professional valuation to demonstrate market value
- Arm's length transactions: Sales to connected parties require extra care to ensure genuine market value
- Documentation: Keep records showing how market value was determined
Transfers to specified asset-locked bodies
Your CIC's articles can name specific organisations that can receive assets without full payment. These must be asset-locked bodies, and you should name them when drafting or amending your articles.
Transfers with Regulator consent
If you want to transfer assets below market value to an asset-locked body not named in your articles, you need the CIC Regulator's consent. Submit Form CIC53 with:
- Details of the proposed transfer and recipient
- Evidence the recipient is an asset-locked body
- Explanation of why the transfer benefits the community
The Regulator typically responds within 10 working days for straightforward requests.
Transfers for community benefit
Assets can be transferred where this benefits the community - for example, providing services below cost to beneficiaries, or donating assets to community projects. The key test is whether the transfer genuinely advances the CIC's community purposes.
What happens on dissolution
When a CIC is wound up, the asset lock continues to apply to any remaining assets after debts are paid.
Planning ahead: Name an asset-locked body in your articles to avoid the need for Regulator approval on dissolution. This speeds up the process and gives clarity about where assets will go.
Dividend and interest caps
CICs can attract investment by paying dividends and performance-related interest, but caps ensure the majority of profits are reinvested for community benefit.
How the aggregate dividend cap works in practice
The 35% cap applies to dividends paid to private investors (individuals, companies that are not asset-locked bodies). In practice:
- Calculate distributable profits: Profits available for distribution after Corporation Tax and reserves
- Apply the cap: Maximum 35% of distributable profits can be declared as dividends to private investors
- Reinvest the remainder: At least 65% must be retained for community purposes
Example: A CIC with £100,000 distributable profits can pay up to £35,000 in dividends to private shareholders. At least £65,000 must be retained or used for community benefit.
Dividends to asset-locked bodies are exempt
Dividends paid to other CICs, charities, or other asset-locked bodies do not count towards the 35% cap. This allows CIC group structures where a holding company receives dividends from subsidiaries without restriction.
Choosing the right articles:
- Schedule 2: Choose if you want to attract charitable or social investment that expects no private dividends
- Schedule 3: Choose if you need to attract private investors who expect dividend returns (within the 35% cap)
Performance-related interest cap
If your CIC borrows money and the interest rate varies based on company performance (profit-linked loans), there's a separate cap on this interest.
Standard interest: Fixed-rate or SONIA-linked interest is not subject to the performance-related interest cap. Only interest that varies based on the CIC's financial performance is capped.
Director remuneration and the asset lock
Paying CIC directors is permitted, but excessive remuneration can breach the asset lock by extracting value that should benefit the community.
What is reasonable remuneration?
There is no fixed formula. Consider:
- Market rates: What would a person of equivalent skill and experience be paid in a similar organisation?
- Time commitment: Part-time directors should be paid proportionately
- CIC resources: Remuneration should be affordable without compromising community purposes
- Transparency: All director remuneration is disclosed in the annual CIC34 report
Red flags for the Regulator:
- Director pay that is significantly above market rate
- Large pay rises without corresponding change in responsibilities
- Remuneration that absorbs most of the CIC's income
- Patterns suggesting assets are being extracted through pay
Annual reporting requirements
All CICs must file an annual Community Interest Company Report (Form CIC34) that includes information about asset lock compliance.
The CIC34 report is publicly available and demonstrates your CIC's ongoing commitment to community benefit. It covers:
- Activities undertaken for community benefit
- How stakeholders were consulted
- Directors' remuneration (each director's pay and benefits)
- Transfers of assets at below market value
- Dividends paid (if a CIC limited by shares)
Common asset lock questions
Can we pay bonuses to staff?
Yes. Staff pay and bonuses are normal business expenses, not distributions of assets. They are not subject to the asset lock or dividend cap, but should be reasonable and proportionate to the work performed.
Can we invest in other companies?
Yes. Investing CIC funds in shares, property, or other assets is permitted if it's for the CIC's benefit. The asset lock applies to how any returns are eventually distributed, not to making investments.
Can we convert from a CIC to an ordinary company?
Conversion from a CIC to an ordinary limited company is heavily restricted. The asset lock continues to apply to all assets the company held as a CIC - they cannot be distributed to private shareholders even after conversion. In practice, this makes conversion impractical.
What happens if we breach the asset lock?
The CIC Regulator has powers to investigate suspected breaches. Potential consequences include:
- Orders requiring assets to be returned
- Appointment of directors by the Regulator
- Vesting company property in the Official Property Holder
- Asset freezes and restrictions on transactions
- Potential personal liability for directors involved in the breach
Converting a charity to a CIC
If you are converting a charity to a CIC, you need prior written consent from the Charity Commission (England and Wales) or OSCR (Scotland). The charity's assets become subject to the CIC asset lock on conversion.
Consider whether CIC status is appropriate - you will lose charitable tax advantages including exemption from Corporation Tax and eligibility for Gift Aid.
Comparison to other structures:
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Review your articles of association
Check which model articles your CIC uses (Schedule 1, 2, or 3) and which asset-locked bodies are named for asset transfers.
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Establish valuation procedures
For significant asset disposals, create a policy for obtaining and documenting market valuations.
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Document all below-market transfers
Keep records of any transfers to asset-locked bodies, including Regulator consent where required.
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Review director remuneration
Ensure director pay is reasonable and defensible. Benchmark against similar organisations.
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Prepare for annual reporting
Track community benefit activities, stakeholder engagement, and all information required for Form CIC34 throughout the year.
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Plan for eventual dissolution
Name an asset-locked body in your articles so residual assets transfer smoothly without Regulator approval.