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HMRC internal manual

Stamp Taxes on Shares Manual

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HM Revenue & Customs
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Companies and shareholders: scrip dividends and stock dividends: optional stock dividends (scrip) - overview

Shareholders’ rights usually include an entitlement to a share in the company’s profits in the form of a dividend. This is normally paid in cash but some companies offer shareholders the option of taking all or part of the dividend in the form of additional shares in the company (‘scrip dividends’ or ‘optional stock dividends’). Shareholders who elect to do so receive shares equivalent in value to the cash dividend alternative. The share value is not discounted (unlike DRIPS STSM078030) but the shareholder saves dealing costs. For the company, scrip dividends are a way of capitalising part of their distributable profits, reducing the need to pay out cash to shareholders.

The stamp taxes treatment of optional stock dividends depends upon whether they are paid in the form of newly issued shares or existing registered shares bought on the secondary market:

  • Where a shareholder elects to receive a share reserve stock dividend, the company uses the value of the cash dividend foregone to subscribe for an issue of new shares out of its share reserves. This issue is outside the scope of the principal charge to SDRT, as there is no transfer of existing securities. In the situation where a shareholder elects to receive a dividend in the form of newly issued shares in a UK company which are to be simultaneously delivered to a depositary receipt issuer or clearance service, no 1.5 per cent SDRT charge will arise: see STSM054010.
  • Where a stock dividend is paid with registered shares, the value of the cash dividend foregone is used to purchase further registered shares in the company on the secondary market, which are then distributed to the shareholder. In this case existing securities are transferred and SDRT is chargeable at 0.5 per cent on consideration equal to the amount of cash dividend foregone. In the situation where a shareholder elects to receive a dividend in the form of newly issued shares in a UK company which are to be simultaneously delivered to a depositary receipt issuer or clearance service, there will be a charge to SDRT or stamp duty at 1.5 per cent of the cash dividend foregone- see STSM055130.

These optional stock dividends are not to be confused with mandatory stock dividends, typically issued by US-registered companies, whereby new shares are distributed in proportion to a shareholder’s holding instead of cash dividends under the terms of a company’s articles of association. Stock dividend payments are mandatory- there is no option of a cash payment. See STSM078020.