Annex 1: Minor changes in the law made by the Act: Change 85: Stock dividends from UK resident companies: the net amount of stock dividends: section 412
This change relates to the simplification of the rules concerning the net amount of stock dividends.
Under section 249(4) of ICTA an individual is taxed on “income of an amount which, if reduced by an amount equal to income tax on that income at the Schedule F ordinary rate …, would be equal to the appropriate amount in cash”. The expression “appropriate amount in cash” is defined in section 251(2) to (4) of ICTA. This covers a variety of possible situations.
Where the stock dividend is simply chosen in lieu of an ordinary cash dividend (that is, the stock dividend falls within section 249(1)(a) of ICTA), “the appropriate amount in cash” is the amount of the alternative cash dividend, unless that is substantially different from the share capital’s market value. If it is substantially different (whether more or less), “the appropriate amount in cash” is that market value (see section 251(2)(a)(i) and (b) of ICTA). Statement of Practice A8 explains that the Inland Revenue generally regard a difference of 15% of the market value as substantial, but are normally prepared to allow a difference of 17%.
Where the stock dividend is bonus share capital (that is, the stock dividend falls within section 249(1)(b) of ICTA), the situation is more complicated.
If there is a related cash dividend (a separate cash dividend, payable in respect of a different class of shares in the company, the amount of which determines, or is determined by, the quantity of share capital issued as stock dividend), “the appropriate amount in cash” is the amount of that related cash dividend, unless that is substantially different from the share capital’s market value. If it is substantially different (whether more or less), “the appropriate amount in cash” is that market value (see section 251(2)(a)(ii) and (b) of ICTA).
For these purposes, however, if there is also an accompanying cash dividend (a cash dividend in respect of the same shares as the stock dividend) the amount of the related cash dividend is treated as reduced by the amount of the accompanying cash dividend (see section 251(4) of ICTA).
If there is no related cash dividend, “the appropriate amount in cash” is the share capital’s market value (see section 251(2)(b) of ICTA).
The provisions in ICTA are pretty complex, particularly where the stock dividend is bonus share capital. But, leaving aside the reduction under section 251(4) of ICTA, the general effect is to tax the cash dividend alternative or something not substantially different from the market value of the share capital.
Therefore in rewriting these provisions the rules which apply where the amount of the alternative cash dividend is not used have been modified so that, for a stock dividend taken in lieu of an ordinary cash dividend, it is clearly stated in section 412(2) that in the case of an issue of share capital in lieu of a cash dividend where the difference between the cash dividend alternative and the market value of the share capital exceeds 15% of that market value, the market value is taken instead. In addition, the rule in section 251(2)(a)(ii) and (4) of ICTA is omitted so that under section 412(3) for a stock dividend which is bonus share capital, the net amount will always be the share capital’s market value.
This change is adverse to some taxpayers and favourable to others in principle and in practice. But the numbers affected and the amounts involved are likely to be small.