HMRC internal manual

Company Taxation Manual

Building societies: application of CT: mergers: bonus payments

Members vote for a ‘Transfer of Engagements’ under Section 96 Building Societies Act 1986 (BSA86/S96). As an inducement to vote for the transfer, it is common for one or both societies to make a distribution of funds. This is usually referred to as a bonus. BSA86/S96 does not prescribe which society is to make the distribution, or the manner of distribution.

The term ‘members’ may include both shareholders and borrowers depending upon the society’s rules. Societies normally pay a cash bonus to shareholders. Some societies may also allow borrowers a temporary reduction in their mortgage rate.

A bonus paid under BSA86/S96 may be treated as a distribution within CTA2010/Part 23 (formerly ICTA88/Part VI) and/or as a dividend under the Income Tax (Building Societies) Regulations SI1990/2231 (‘the Regulations’) depending on the recipient. A bonus paid by a society:

  • to the society’s own shareholders is both a distribution and a dividend,
  • to the society’s own mortgagors is similarly a distribution and a dividend,
  • to the shareholders of another society is not a distribution, but is a dividend,
  • to the mortgagors of another society is neither a distribution nor a dividend if it is paid prior to the Transfer of Engagements. (If it is paid after the transfer, it will be both a distribution and a dividend.)

A society will, therefore, have to account for tax under the Regulations on any bonuses paid, with the exception of bonuses paid to mortgagors of another society prior to the Transfer of Engagements.

CT&VAT (Technical) should be consulted in cases of difficulty or where the treatment outlined above is disputed.