Particular topics: transactions in securities: meaning of abnormal dividend
Meaning of ‘abnormal dividend‘
See ITA07/S692-694 for income tax advantages on or after 6 April 2007 or ICTA88/S709 (4)(B) and ICTA88/S709 (6)(A) - (B) for income tax advantages prior to 6 April 2007 and corporation tax advantages all periods.
An abnormal dividend substantially exceeds a ‘normal return ‘ on the amount paid for the security attracting the dividend in relation to the period of ownership. Fixed rate dividends or interest on shares held for less than six months is abnormal if it exceeds the amount receivable on a pro rata basis.
A person subscribes £10,000 for 10,000 £1 shares in a company. One week later the company pays a dividend of £0.05p per share, the shareholder receives £500. This is an abnormal dividend. The dividend paid after one week represents an annual yield of £500 x 52 = £26,000. This is a 260% return on the £10,000 subscribed and ‘substantially exceeds ‘ a normal return.