Dividends and other company distributions: introduction
A distribution from a company is anything that the company gives to one of its shareholders without the shareholder giving full payment in return. The most common type of distribution is a dividend, a cash distribution of the company’s profits. This chapter of the Savings and Investment Manual (SAIM) explains the tax treatment of dividends and other types of distribution, including distributions by Real Estate Investment Trusts (REITs), in the hands of the individual investor. See the Company Taxation Manual (CTM15000 onwards - SAIM20000) for the tax treatment of distributions from the point of view of the company paying or receiving distributions.
The SAIM does not deal with the tax treatment of stock lending or manufactured dividends. The legislation on these topics for both individuals and companies is explained in the Corporate Finance Manual (CFM74100 onwards for stock lending and CFM74300 onwards for manufactured dividends - SAIM20000). The rules for sale and repurchase agreements (‘repos’) are different for individuals and companies. The legislation for individuals is in ITA07/Part 11 and the treatment of price differences under repos as interest is explained at SAIM2200.
Dividends and other distributions are Savings and Investment income
Dividends and other company distributions are chargeable to income tax as Savings and Investment income under Part 4 of the Income Tax (Trading and Other Income) Act 2005. The legislation was rewritten under Tax Law Rewrite and applies for 2005-06 onwards. Previously dividends and other distributions were taxable as Schedule F income under ICTA88/S20. The charge under Part 4 of ITTOIA05 includes the following.
- Dividends and other distributions from UK companies (chapter 3). See SAIM5020.
- Dividends from non-UK resident companies (chapter 4). See SAIM5210, which also deals with ‘foreign dividend coupons’ taxable under Chapter 13 of Part 4.
- ‘Stock dividends’ (chapter 5). See SAIM5150.
- Amounts released from loans from a close company to its participators (chapter 6). ‘Distribution’ here has an extended meaning (SAIM5200).
For income tax purposes, ITA07/S19 defines ‘dividend income’ to include amounts chargeable under Chapters 3, 4, 5, and 6 of Part 4 of ITTOIA05, the items listed above. It also includes ‘relevant foreign distributions’ (a distribution of a non-UK resident company taxable under Chapter 8 of Part 5 of ITTOIA05 as income not otherwise charged - see SAIM5210). The tax rates applicable to such amounts are the dividend ordinary and dividend upper rates (ITA07/S13), or dividend trust rates, as appropriate (SAIM1080).
Building society ‘dividends’
Holders of certain types of building society accounts receive ‘dividends’. These are taxed as interest. See SAIM2200.
Dividends etc. from collective investment schemes
Particular rules apply to amounts treated as dividends etc. received by investors in collective investment schemes (see SAIM6000 onwards), and as part of share incentive plans (SIPs - see SSM1.0).
UK Real Estate Investment Trusts
The rules in Part 4 ITTOIA05 do not apply to distributions from the tax exempt income of a UK Real Estate Investment Trust (SAIM5300).