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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Distributions: stock dividends: definitions

CTA10/S1049 and S1151

Below are definitions of various terms that appear in the stock dividends legislation.

Stock dividend

A stock dividend can be either:

  • share capital issued by a UK resident company in lieu of a cash dividend,

or

  • bonus share capital issued by a UK resident company in respect of any shares in the company of a qualifying class.

See CTM17005 for the contrast with ordinary bonus issues.

Bonus share capital

This is means share capital that is issued otherwise than wholly for new consideration, or the part of any share capital issued that is not for new consideration.

In lieu of a cash dividend

This applies if

  • the share capital is issued in consequence of the exercise by a person of an option, and
  • that option is an option to receive, in respect of shares in the company, either a cash dividend or additional share capital.

Option is defined to include both a simple choice, and an offer to acquire one asset subject to a right to choose the other. For this purpose, exercise of an option includes abandonment of or failure to exercise this type of right.

Shares of a qualifying class

Shares are of a qualifying class where:

  • shares of that class carry the right to receive bonus shares in the company of the same or a different class,

and

  • that right arises from the original or varied terms of the shares of that class.

The cash equivalent

This is the measure of the income a stock dividend represents. It is defined in ITTOIA05/S412

It is the amount of the cash dividend alternative unless the difference between the cash dividend alternative and the market value of the share capital is 15 per cent or more, in which case market value applies. See SAIM5170.

Cash dividend

Where a person has exercised an option to take shares in lieu of a cash dividend, the relevant cash dividend is the amount of the cash dividend that the person could have opted for.

However, a company will often pay a small cash dividend along with a stock dividend, in order to preserve trustee status for the shares.

The legislation is silent on the approach to adopt where the person receives both a stock dividend and a cash dividend together with it. In practice, the ‘cash dividend’ for the purposes of the legislation will be the amount of dividend the person could have opted for less the cash dividend actually paid to the person.

A company may also pay a small cash dividend if a stock dividend is only made available in respect of a multiple of a certain number of shares. Similarly, the ‘cash dividend’ will be the dividend otherwise available on the total shareholding less the small cash dividend paid on some of the shares.

Where the company has issued the stock dividend in a quantity which is determined by, or which determines, the amount of a cash dividend payable on a different class of the company’s shares then if the company pays an accompanying cash dividend as well as a stock dividend on the same shares the ‘cash dividend’ will be the amount of the cash dividend payable on the different class of shares less the amount of the accompanying cash dividend.

In other cases the ‘cash dividend’ will be the amount of the cash dividend payable on the different class of shares.