Income Tax On Scrip Dividends

chateauneufdupape

I am a 40% tax payer and receive Scrip Dividends from Rolls Royce. For my Income Tax return, do I add up the "C Share Redemption Payable" amounts for the year and enter this figure in the box that says "Dividends from UK companies. Do not include the tax credit"?

barak

There isn't any liability for Income Tax whatever you do with your 'C' shares. I opt to redeem mine for cash and invest automatically in new Ordinary Shares. This could result in a Capital Gain.

http://www.rolls-royce.com/investors/shareholder_services/payments_shareholders/c_shares/index.jsp

pchelpman

barak wrote: »

There isn't any liability for Income Tax

Sorry, barak, this is a dangerous statement. Higher rate or additional rate income tax might be due.

If a higher rate taxpayer receives cash dividends the amount must be declared on the Tax Return, dividend section, and further tax paid accordingly.

If the shareholder CHOOSES to receive shares INSTEAD OF hard cash the situation is unchanged.

For scrip dividends generally, if the shareholder chooses to reinvest the cash that would otherwise be paid out, then the dividends are still taxable as if cash had been received.

They are declared on the Tax Return as such.


(Also the shares maybe liable to CGT if/when sold at a profit)

00ec25

pchelpman wrote: »

Sorry, barak, this is a dangerous statement. Higher rate or additional rate income tax might be due.

you are both right,

however as the OP was specifically in the context of Rolls Royce shares then the advice given is correct, it is not a dangeropus statement in the specific context of the question asked - C shares are classed as CGT liable transactions whether they are sold under the automatic process and the proceeds taken as a (quasi) "dividend" subsistitue payment or is used to fund a "scrip"

chateauneufdupape

Thanks 00ec25, your post arrived whilst I was typing which answers my question below.

From the link posted by Barak:-


Shareholders can opt for one of the following:

• redeem all C shares for cash;
• redeem the shares for cash and reinvest the proceeds in additional Ordinary Shares;
• keep the C Shares.

In summary:

• The issue of C shares should not give rise to a charge to UK Income Tax or Capital Gains Tax.
• The redemption of C shares for cash may, depending on your circumstances, give rise to a Capital Gains Tax charge. Many individual shareholders, however, will find that no tax is payable because the chargeable gain on the redemption of the C shares for cash (together with any other chargeable gains for the tax year in question) is less than the annual exempt allowance. To check the current annual exempt allowance please go to http://www.hmrc.gov.uk/rates/cgt.htm.

I opted to redeem the shares for cash and reinvest the proceeds in additional Ordinary Shares. I am well below the annual CGT allowance figure so can you confirm that I do not need to make any declaration on my Income Tax return rearding these scrip shares?

pchelpman

00ec25 wrote: »

the OP was specifically in the context of Rolls Royce shares then the advice given is correct, it is not a dangeropus statement in the specific context of the question asked

Thanks for the clarification 00ee25.

My comments were more of a general nature as i indicated at the start of my 4th paragraph.

00ec25

chateauneufdupape wrote: »

can you confirm that I do not need to make any declaration on my Income Tax return rearding these scrip shares?

pedanatically it is not an Income Tax return - it is tax return per se , it covers more than just income tax...

the purchase of the "scrip" shares with the proceeds from the sale of your C shares would never need to be declared on the SA tax return, (the purchase of an asset is irrelevant in the context of personal taxation). However the value you receive from the intial redemption of the shares needs to be considered against your total CGT liable transactions in the tax year to help you decide if you need to do the CGT pages of the tax return as follows:

either: the total value of your capital gain in the tax year was > than the annual allowance (£10,600 at 11/12 rate) - for example you have profits from the sale of other shares (or you sell a second home for a profit) then you add your C share redemption value to that profit to give the total CGT gain for the year, if this total >10,600 then yes in principle you would be taxed on your C shares as they are an element of your capital gain that year even if you used the money to buy into the "scrip"

or: the total (sales) proceeds from capital gains transactions in the tax year was > 4 x the then annual allowance (so £42,400 at 11/12 rate) - as above C shares redemption value plus all other CGT liable sales proceeds total is >42,400 , then you must notify HMRC even if you have not actually made an overall profit

The Rolls Royce arrangement is not a true scrip offer, as you realise for a scrip dividend it is classed as an element of your income and goes against income tax. Conversely the RR C Shares conversion into ordinary shares is not a scrip becuase you are effectively purchasing ordinary shares from your own "wealth" (in the form of money you received from the sale of C shares) not from your income derived from a normal dividend and reinvested through a traditional DRIP

John_Pierpoint

I'm old enough to remember last time Rolls Royce went bust - but like the banks it had to be rescued by the tax payer. In those days it paid out dividends and scooped them all back in again with a rights issue.
Time and again.

What is actually happening this time round? Some giant Ponzi scheme:

Need money?
We have printed this piece of paper. See if you can sell it to someone else (like a pension fund or a charity). That is your capital gain tax free for this year.
That way we convert dividends into expenses - make no profit and so pay no tax as a company and you pay no tax as an individual.
Surely turning dividends into interest payments and avoiding 40/50% tax rates cannot be that simple or every company would be in on the act?

00ec25

John_Pierpoint wrote: »

Surely turning dividends into interest payments and avoiding 40/50% tax rates cannot be that simple or every company would be in on the act?

don't know the full technicalities but RR has been doing it this way since 2003, initially via B shares then since 2008 as C shares - both classes are redeemable preference shares which the company itself redeems, they have no open market value and cannot be traded except through RR itself redeeming them for cash equivalent to the "pseudo" dividend

It too surprises me that others do not do this, maybe it has some implication on their corporation tax position?