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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’ as a general term is 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, as bonus share capital (meaning no new consideration is provided to the company in return). 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 as defined in the legislation are treated as income by virtue of CTA10/S1049, and taxable as savings income under ITTOIA05/PART4/CHAPTER5 S409 to S414.

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:

  • 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)), or
  • 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 ordinary bonus issues that a company makes, which involve the capitalisation of reserves and allotment to shareholders of bonus shares pro-rata to existing holdings. Such bonus issues arise 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 ITTOIA05/PART4/CHAPTER3 on distributions of bonus shares, and under ITTOIA05/PART4/CHAPTER5 on stock dividends. For tax years up to 2015-16, distributions of bonus shares were ‘non-qualifying distributions’ that did not attract dividend tax credits before these were abolished. See SAIM5050