Introduction Background Note
28.Dividends received by individual shareholders are taxed at rates of 10 per cent and 32.5 per cent for basic rate and higher rate taxpayers respectively in 2009-10.
29.When dividends from UK resident companies are charged to tax, shareholders are entitled to a non-payable tax credit of one ninth of the distribution under the provisions of section 397(1) of ITTOIA. Because tax is charged on the gross dividend received, including the tax credit, this lowers the effective rate of tax on these dividends at the personal level to 0 per cent for basic rate taxpayers and 25 per cent for higher rate taxpayers. By contrast, until recently, there has been no tax credit available to shareholders in non-UK resident companies.
30.Finance Act 2008 introduced the first stage in a two-part reform of the system of taxing foreign personal dividends. The non-payable tax credit was extended to individuals in receipt of dividends from non-UK resident companies, subject to conditions. From 6 April 2008, a person qualified for the tax credit if they own less than a 10 per cent shareholding in the distributing non-UK resident company and the company was not an offshore fund.
31.Budget 2008 announced legislation in the Finance Bill to deal with the situation of individuals who own 10 per cent or more of the shares in a non-UK resident company. This legislation delivers that announcement.