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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Stock dividends: computations

Stock dividends may be paid both by quoted and private companies. The computation isthe same. The example deals with a stock dividend paid by a private company in 2000-01. Itillustrates how the payment of a stock dividend immediately before the sale of the sharescould reduce the total tax bill payable on the sale. It goes on to show that if Mr Wattssold his shares in 2002-03, taking a stock dividend would increase the total tax billpayable on the sale. This is because Finance Act 2002 provides for the maximum rate ofbusiness assets taper relief to be available after 2 years.


  • Before 31 March 1982, Mr Watts subscribes at par for all 1,000 £1 ordinary shares in Purely Paper Ltd, a trading company.
  • July 2000 Purely Paper Ltd declares a cash dividend of £10 per share. It also gives Mr Watts the option of taking the dividend in the form of 10 £1 ordinary shares for every share held. Mr Watts opts to take the shares.
  • August 2000 Mr Watts sells all 11,000 shares in Purely Paper Ltd to a public company for £1.2M cash.


Compute the value of `the appropriate amount in cash’. See CT1701(d) and (f).ICTA88/S251 (2)(b) applies and this is the market value of 10,000 £1 ordinary shares inPurely Paper Ltd in July 2000. Because the shares are unquoted this value must be agreedby SAV.

Mr Watts argues the value must be close to the arm’s length sale price in August 2000. SAVaccept the value is

10,000 X £1.2M = £1.090.909

This figure is grossed up at the starting rate of tax.

£1.090.909 x 100 = £1.212,121

Mr Watts has a higher rate liability on this sum.

£1,212,121 At 32.5% = £393,939  
Less tax paid   £121,212  
Income tax due   £272,727  

Capital Gains Tax computation

Mr Watts is treated as though he paid the appropriate amount in cash for the shares,£1,090,909. He has to agree the value of his shares at 31.3.82 with SAV because theshares are unquoted. The agreed value is £80,000.

  Disposal proceeds   1,200,000  
  Allocated Stock dividend shares Original shares  
  10,000-stock dividend shares      
  1,000-original shares      
  Cost   109,090  
less Appropriate amount in cash 1,090,910    
  Gain Nil    
  31.3.82 value agreed Unindexed gain   80,000  
  Indexation restricted so no loss created   29,090  
  Gain   Nil  

Mr Watts has a total tax liability of £272,727 on the transactions.

If the company had not paid the stock dividend his Capital Gains Tax liabilitywould be

  Disposal Proceeds   1,200,000  
less Cost   80,000  
    Unindexed gain 1,120,000  
less Indexation (factor to April 1888 1.047) 83,760    
    Chargeable gain 1,036,240  

Taper relief: Mr Watts has held the shares for two whole years since taper relief began inApril 1998. The shares are business assets for taper relief purposes. The amount of thegain that would remain chargeable would be 75% = 777,180

Capital Gains Tax at 40% 310,872
Tax saving by taking stock dividend in 2000-01 38,145

If Mr Watts sold his shares in 2002-03, taking the stock dividend would increase the totaltax bill payable on the sale. This is because taper relief reduces his capital gains taxliability so greatly.

If he took the stock dividend his higher rate income tax liability would remain the sameat £272,727

If he did not take stock dividend his Chargeable gain

would be the same as in 2000-01 £1,036,240 but taper relief

would reduce the amount chargeable to 25% = £259,060

Capital Gains Tax at 40% 103,624
Tax saving by not taking stock dividend in 2002-03 169,103