CFM71070 - Other tax rules on corporate finance: building society transfers of business: bonus payments and dividends

Building society transfers of business: bonus payments and dividends

Members vote for a ‘Transfer of Engagements’ under section 96 Building Societies Act 1986 (BSA86/S96). As an inducement to vote for the transfer, it is common for one or both societies to make a distribution of funds. This is usually referred to as a bonus. BSA86/S96 does not prescribe which society is to make the distribution, or the manner of distribution.

The term ‘members’ may include both shareholders and borrowers depending upon the society’s rules. Societies normally pay a cash bonus to shareholders. Some societies may also allow borrowers a temporary reduction in their mortgage rate.

A bonus paid under BSA86/S96 is treated as a distribution within CTA10/Part 23 and/or as a dividend under the Income Tax (Building Societies) Regulations SI1990/2231 (‘the Regulations’) depending on the recipient. A bonus paid by a society:

• to the society’s own shareholders,
• to the society’s own mortgagors,
• to the shareholders of another society

However, where a bonus is paid to the mortgagors of another society it is neither a distribution nor a dividend if it is paid prior to the Transfer of Engagements. (If it is paid after the transfer, it will be both a distribution and a dividend.)

While these payments are called ‘dividends’, they are not typically distributions for the purposes of the Taxes Acts. CTA10/S1054 provides that dividends and other distributions paid by a building society to its members are not distributions for the purposes of the Corporation Taxes Acts, while ITTOIA05/S372 provides that dividends received from Building Societies are taxed as interest for the purposes of the Income Tax Acts.

A society will, therefore, have to account for tax under the Regulations on any bonuses paid, with the exception of bonuses paid to mortgagors of another society prior to the Transfer of Engagements.

In the case of a transfer of business under section 97 of the Building Societies Act 1986 or a transfer under the Mutual Societies (Transfers) Order 2009 compensation dividends, including the statutory distribution made under Section 100 (2) of the Building Societies Act 1986, or cash in lieu of a right to acquire shares in a society’s successor company, are not regarded as distributions or as dividends on which tax is payable by the society and if paid by the society they are not allowable deductions for corporation tax purposes.