Distributions: stock dividends: introduction
Companies may sometimes offer shareholders a choice of either a cash dividend or additional shares.
The company will benefit from the issue of shares in lieu of a cash dividend, because:
- the company will not need to part with cash for the dividend,
- for distributions made before 6 April 1999, the company will not have had to pay ACT.
Also, if a company already has surplus ACT, paying a stock (or ‘scrip’) dividend avoided increasing that surplus.
A stock dividend can arise either:
- on the exercise of an option by a member to receive shares rather than cash,
- on a bonus issue in respect of shares of a relevant class in the company.
The more common situation is where a company gives its members the option to receive shares instead of cash. The amount of the stock dividend for tax purposes is the amount of the alternative cash dividend. This is providing the market value of the new shares on the relevant date does not substantially differ (see CTM17010) from the amount of the cash dividend.
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 instead, CTA10/S1049 does not apply and there is no distribution unless CTA10/S1026 applies. See also CG51823.
A basic or higher rate taxpayer may opt to receive a stock dividend if more interested in enlarging shareholding rather than receiving cash. The stock dividend will allow the taxpayer to increase shareholding without incurring dealing costs.
The situation will be different for:
- an exempt institutional investor such as a pension fund,
- an individual for whom the tax credit on a dividend made prior to 6 April 1999 would be payable,
as the notional IT on a stock dividend cannot be repaid.
The legislation on stock dividends at CTA10/S1049 to S1053 applies where the shares are issued to:
- personal representatives of deceased persons,
- trustees of discretionary trusts.
See ITTOIA06/S409 and S410. The persons charged are collectively referred to in what follows as individuals etc. Shares issued to companies as beneficial shareholders are unaffected.
Where an issue of shares is caught by the legislation, by virtue of CTA10/S1049 neither:
- CTA10/S1000 C (issue of redeemable shares treated as a distribution - see CTM15450),
- CTA10/S1022 or S1026 (repayment of share capital preceding or following the issue of bonus shares treated as a qualifying distribution - see CTM15400+),
apply to that 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, either qualifying or non-qualifying. This is so even if the stock dividend comprises redeemable share capital or follows a repayment of share capital. Also, a stock dividend cannot constitute the first leg of a potential distribution by virtue of CTA10/S1026 (which provides that if a company makes a bonus issue of shares followed by a repayment of that share capital, the repayment is not treated as such).
SAIM5170 gives details of the income tax charge. The stock dividend legislation does not affect company shareholders except where the company holds shares as a trustee of a discretionary trust.
The bonus issue of shares is not income in the company’s hands, applying the principle established in CIR v Blott (1921) 8TC101 and CIR v Wright (1926) 11TC181.
However, the legislation at CTA10/S1000 C (bonus redeemable shares) and CTA10/S1022 and S1026 (bonus issues linked with share capital repayment) continue to apply where a company receives a stock dividend.
If the recipient of a stock dividend comprising redeemable shares is a UK resident company, so that 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 does 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 or FII. Also, the company acquires no additional CG cost for the shares, TCGA92/S141 (1).
If a company issues a stock dividend to an individual etc after repaying share capital, there is no liability under CTA10/S1022, which provides 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 the stock dividend either wholly or partly to any other member such as a company, CTA10/S1049 (3) does not apply to that part. In these circumstances the company has issued the stock dividend other than for new consideration, and liability may arise on the issuing company under CTA10/S1022 (see CTM15420). This would result in FII for the recipient company.
Similarly, a stock dividend to a recipient other than an individual etc will be a bonus issue for the purposes of CTA10/S1026 (see CTM15400).
Normal bonus issues
The stock dividend provisions do not normally apply to most common kind of bonus 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 is only a stock dividend if the shares it relates to are ‘shares of a relevant class’. Neither:
- the standard provision contained in a company’s Articles permitting it to make such an issue,
- a company’s Resolution specifically authorising such an issue,
is considered to make the shares in question ‘shares of a relevant class’ within CTM17010.
CTISA (Technical) will advise if necessary. See ‘Technical Help’ on the left bar.
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 there is normal distribution treatment.
Only quoted companies are likely to issue stock dividends which serve a commercial purpose. See also CG58763 where unquoted companies issue stock dividends, and SAIM5150 concerning the IT consequences.
It may be worth checking
* that a share issue is not simply a normal bonus issue outside the scope of the stock dividend legislation details of the shareholders who took the stock dividends, and * how the company has calculated the cash value of the stock dividend (the cash equivalent). * ITOIA05/S412 applies for determining the cash equivalent - see SAIM5170. ### CGT See CG33800+ and CG58750+ concerning CGT.