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HMRC internal manual

Savings and Investment Manual

Dividends and other company distributions: stock dividends: introduction

‘Stock dividends’ are taxable as income

‘Stock dividend’ is a term often used to describe the case where a company, particularly a quoted company, offers its shareholders the option of receiving additional shares in lieu of a cash dividend, or as bonus share capital. This may be advantageous to the shareholder, who can avoid the dealing costs involved in buying fresh shares in the company, and may be preferable to the company which does not have to pay out cash. ‘Stock dividends’ may also be referred to as ‘scrip dividends’ or ‘bonus issues’.

Stock dividends are treated as income by virtue of CTA10/S1049, and taxable as savings income under Chapter 5 of Part 4 of ITTOIA05 (sections 409 to 414).

Meaning of ‘stock dividend income’

ITTOIA05/S409 imposes a tax charge on ‘stock dividend income’. ITTOIA05/S410 defines ‘stock dividend income’ as arising if a UK resident company issues share capital in the following circumstances:

  • Share capital issued as a result of the shareholder exercising an option to choose whether to receive an ordinary cash dividend or additional share capital (CTA10/S410(1)(a)).
  • ‘Bonus share capital’ issued in respect of shares which, under their terms (whether original or otherwise), carry the right to bonus share capital (CTA10/S410(1)(b)).

Not all bonus issues are stock dividends

The stock dividend rules do not apply to the normal bonus issue that a company makes, which involves the capitalisation of reserves and allotment to shareholders of bonus shares pro-rata to existing holdings. Such a bonus issue arises from a specific resolution and not from the terms of the shares themselves. CTM17005 explains this in more detail. From the point of view of the shareholder, the difference is that the higher rate income tax charge is under Chapter 3 of Part 4 ITTOIA05 in respect of non-qualifying distributions of bonus shares, and under Chapter 5 of Part 4 in respect of stock dividends.