CTM17005 - Distributions: stock dividends: introduction
CTA10/S1049
Companies may sometimes offer shareholders a choice of either a cash dividend or additional shares.
The company will benefit from the issue of shares instead of a cash dividend, because:
- the company will not need to part with assets,
and
- for issues of shares before 6 April 1999, the company did not have to pay Advance Corporation Tax (ACT) as there was no actual distribution.
The latter feature was quite significant as many companies, particularly those with foreign income attracting double tax relief, built up large amounts of ‘surplus ACT’ they could not set against Corporation Tax (CT). Stock (or ‘scrip’) dividends avoided adding to the surplus.
A stock dividend can arise either:
- on the exercise of an option by a member to receive shares rather than cash,
or
- on a bonus issue in respect of ‘shares of a relevant class’ in the company.
Where there is a simple option for members to receive shares instead of cash the amount of the stock dividend for tax purposes is the amount of the cash dividend alternative provided the market value of the new shares on the relevant date is not substantially different (see CTM17010) from the amount of the cash alternative.
CTA10/S1049 applies to share capital issued by a UK resident company. Where a non-UK resident company declares a cash dividend and shareholders are given the option of taking up further shares CTA10/S1049 does not apply and there is no distribution unless and until CTA10/S1026 applies on the ground that there is a repayment of share capital issued as ‘bonus’ (not for new consideration received by the company) and therfore effectively as a capitalisation of profts. See also CG51823.
A basic or higher rate Income Tax payer may opt to receive a stock dividend if more interested in enlarging shareholding (without usual dealing costs) than receiving cash.
When payable tax credits existed, an important feature was that, in contrast to credits on qualifying distributions, the Income Tax asociated with stock dividends was not recoverable. But this is no longer significant.
Individuals etc.
The legislation on stock dividends at CTA10/S1049 to S1053 applies where the shares are issued by a company to:
- individuals,
- personal representatives of deceased persons, and
- trustees of discretionary trusts.
ITTOIA05/S409 and S410 deals with the recipient’s charge and timing. The persons charged are referred to here as ‘individuals etc.’. Recipients within the CT charge (‘CT payers’) are unaffected by those provisions.
Where CTA10/S1049 applies to an issue of shares neither:
- CTA10/S1000 C (bonus issue of redeemable shares treated as a distribution - see CTM15450),
nor
- CTA10/S1022 or S1026 (which trigger distributions where a bonus issue accompanies or follows repayment of share capital, or repayment of share capital follows a bonus issue, see CTM15400 onwards)
applies to the share issue.
The stock dividend legislation thus provides that in no circumstances will a stock dividend received by an individual etc. be treated as a distribution. Distributions otherwise within CTA10/S1000(1) C are known as C distributions, formerly “non-qualifying” because they did not attract a tax credit. Those otherwise triggered as qualifying or “non CD” distributions by CTA10/S1022 (H distributions) or S1026 do not have effect. This is so even if the stock dividend comprises redeemable share capital or follows a repayment of share capital, which would otherwise act as triggers for C and H distributions. Nor can a stock dividend act as the first stage (bonus issue) preceding a repayment of share capital to which CTA10/S1026 might apply.
SAIM5170 gives details of the Income Tax charge on individuals etc. The stock dividend legislation does not affect company shareholders who are CT payers, see below.
CT payers
A ‘straightforward’ bonus issue of ordinary shares, meaning one not taking place as an alternative to a cash dividend or on shares of a relevant class, is not income in the hands of a recipient, applying the principle established in CIR v Blott (1921) 8TC101 and CIR v Wright (1926) 11TC181. That is why CTA10/S1000(1) C and H, and CTA/S1026 were enacted.
Where the recipient of a stock dividend is a CT payer the legislation at CTA10/S1000 C (bonus redeemable shares) and CTA10/S1022 and S1026 (bonus issues linked with share capital repayment) continue to apply.
If the recipient of a stock dividend comprising redeemable shares is a UK resident company, and so there remains a distribution within CTA10/S1000 C:
- CTA09/PART9A provides (subject to exceptions) that CT is not chargeable on distributions, nor are distributions taken into account in computing income for CT purposes, and
- as a distribution within CTA10/S1000 C does not carry a tax credit the distribution did not represent franked investment income (FII) in the recipient company’s hands.
A bonus issue of shares that is received by a company is thus generally not income through any route. Also, the company acquires no additional CG cost for the shares, TCGA92/S141 (1).
Complex distributions: individuals etc and CT payers compared
If a company issues a stock dividend to an individual etc after repaying share capital, CTA10/S1049 (3) operates such that there is no liability under CTA10/S1022, which would otherwise provide that if a company repays share capital and then makes a bonus issue of shares, the bonus issue is treated as a distribution.
However, if the company issues a stock dividend to a CT payer CTA10/S1049 (3) does not operate. In these circumstances the company has issued the stock dividend other than for new consideration, and CTA10/S1022 may be triggered (see CTM15420) with the receipt of a distribution which however will attract the exemption rules of CTA09/PART9A.
Similarly, a stock dividend in the hands of a CT payer will be a bonus issue for the purposes of CTA10/S1026 (see CTM15400) and thus generate a distribution on repayment, although again subject to the CTA09/PART9A exemption.
Bonus issues on shares of a relevant class
As noted above, the stock dividend provisions do not apply to most common kind of bonus shares issue that a company makes, which is simply the capitalisation of reserves and the allotment of bonus shares to shareholders pro rata to their existing holdings. A bonus issue will however be a stock dividend, even if not alternative to a cash dividend, if the shares it relates to are ‘shares of a relevant class’, see CTM17010 . This is an anti-avoidance measure to prevent the stock dividend rules being side stepped. It will not apply where neither:
- the standard provision contained in a company’s articles permitting it to make the share issue,
nor
- a company’s resolution specifically authorising such an issue,
is considered to make the shares in question ‘shares of a relevant class’.
(This content has been withheld because of exemptions in the Freedom of Information Act 2000)
Dividend Reinvestment Plans
A company may offer a Dividend Reinvestment Plan (DRIP), which allows holders of ordinary shares to use their cash dividends to acquire additional shares. These are purchased on their behalf by a plan administrator usually through a low cost dealing arrangement. These are not stock dividends and the normal distribution rules apply.
Procedure
Only quoted companies are likely to issue stock dividends which serve a commercial purpose. See also CG58750 where unquoted companies issue stock dividends, and SAIM5150 concerning the IT consequences.
Officers may wish to check:
- that a share issue is not simply a normal bonus issue outside the scope of the stock dividend legislation,
- details of the shareholders who received the stock dividends, and
- how the company has calculated the cash value of the stock dividend (the cash equivalent).
ITTOIA05/S412 applies for the purpose of determining the cash equivalent, see SAIM5170.