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HMRC internal manual

Capital Gains Manual

Disposals by trustees: stock dividends: introduction

It is quite common for a company, particularly a quoted company, to offer its shareholders the option of receiving additional shares instead of a cash dividend. The expression `stock or scrip dividend’ is used to describe shares issued in such circumstances.

The basic position under tax law is that when a company makes a bonus issue of shares no distribution arises, and the bonus issue of shares is not income for tax purposes in the hands of the recipient, see CIR v Blott, 8TC101 and CIR v Wright, 11TC181. This principle applies to all kinds of bonus issues, which include stock dividends, unless there is specific legislation dealing with the particular subject, see CTM17000 onwards.


The use of stock dividends by quoted companies became increasingly common in the 1970s, because a person paying high rates of tax could obtain a far greater net return by taking the stock dividend and selling it with a small Capital Gains Tax liability, than by taking the cash dividend and paying higher rate tax which could take most of the dividend. Therefore legislation was enacted, which is now to be found at ITTOIA05/S410. The effect of this legislation is that in certain specified circumstances, for example where the shares are held by an individual, the recipient is charged to higher rate tax on the grossed-up value of the stock dividend. Detailed instructions are to be found at CTM17000 onwards.