Understand CIC asset lock rules

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