Santander scrip dividends/rights issue/Income Tax

caper7

Hi all,

Was wondering if someone could clarify the income tax position with regards to Santander scrip dividends, I currently use their default/Option 1, which is to sell the rights off market and receive cash.
Do I simply add these cash payments to the regular dividends for my Income Tax return?

Secondly, there was a Rights issue back in 2008, UK shareholders were not allowed to take up their Rights, the Rights were sold by Santander and I received a cheque. Should this be included on an Income tax return, and if so where? (ie: added to dividends?)

Any advice welcome.

00ec25

Santander's use of the word "rights" covers 2 completely different situations in the UK context:

the scrip dividend is liable for Income Tax and obviously is declared as an overseas dividend (net of Spanish withholding tax). This is because they are not really "rights" in the UK context, they are simply you receiving a cash dividend because you have chosen to do it that way rather than receiving (scrip) shares. The fact that Santander have to sell these rights in order to get the cash to pay you has no impact on UK tax treatment. If you instead elect to buy the scrip shares you would still have to declare the value of the scrip "purchase" as a dividend received

the (compulsory) sale of the Rights Issue is however different and is treated as a Capital Gains Tax liable item, the reason being the sale of rights issue Rights counts as a disposal of a tradeable item (ie the "rights") and so is a CGT disposal not an income receipt. Therefore you only show this on your tax return if you have exceeded your CGT personal allowance threshold and are therefore liable to pay CGT (or your total proceeds from all CGT liable sales in any one tax year - not just the Santander transaction - is more than £41,200)

caper7

Thank you so much for answering, it's all a lot clearer now!
In terms of the rights issue, I'm nowhere near the CGT threshold, so it's not an issue, but out of curiosity what would the capital gain be? Would it be the whole of the money I received?

John_Pierpoint

How did you come to own Santander shares?

My bet is that you were given "free" shares by the likes of Alliance & Leicester.

If that is true any amount you get for selling your shares would have been Capital Gain.

But there again perhaps you purchased extra shares at the "demutualisation" or since?
Or perhaps some of them were a script dividend at some point in which case you used your dividend (taxed) to buy them.

This is getting ridiculously complicated. So thank heavens for an annual zero rate band (exemption) for the first 10,600 of gain.
And perhaps more to the point, not having to report the calculation until the disposal is 4 times the exempt amount (provided the gain is less than 10,600).
http://www.hmrc.gov.uk/rates/cgt.htm#1

Carole_Hatwell

Many many thanks for such a comprehensive answer.

grey_gym_sock

John_Pierpoint wrote: »

My bet is that you were given "free" shares by the likes of Alliance & Leicester.

If that is true any amount you get for selling your shares would have been Capital Gain.

well, to be pedantic, they weren't free ... you dispose of a share account in a building society with balance £x (this is the cost); and the proceeds are 2 things, a savings account in a bank with (the same) balance £x, and some shares.

there is 1 disposal for CGT purposes when you acquire the shares, with a gain equal to their initial value, less indexation (since this was back when indexation could be used to reduce gains).

there is another disposal when the shares are later disposed of (or part disposed of, which happens when rights (in a rights issue) are sold), with a gain equal to the change in value of the shares since they were first acquired.

John_Pierpoint

I don't think the tax system agrees with you that demutualisation of building societies created any sort of "gain" - it just regarded such shares as "free".
It was just all "gain" when those shares were sold.

But that is all history now as far as I am concerned.

00ec25

grey_gym_sock wrote: »

well, to be pedantic, they weren't free ... you dispose of a share account in a building society with balance £x (this is the cost); and the proceeds are 2 things, a savings account in a bank with (the same) balance £x, and some shares.

there is 1 disposal for CGT purposes when you acquire the shares, with a gain equal to their initial value, less indexation (since this was back when indexation could be used to reduce gains).

there is another disposal when the shares are later disposed of (or part disposed of, which happens when rights (in a rights issue) are sold), with a gain equal to the change in value of the shares since they were first acquired.

please provide HMRC link to support your claim that shares issued free on demutulisation have an original cost for CGT purposes. Until you do you are wrong.

There was no cost and therefore nothing to index

aprt from the above you are quite correct in terms of gain on eventual sale or sale of rights

grey_gym_sock

hmmm ... i was thinking of the C&G demutualisation, in which former building society members received cash payments, not shares, and was reasoning that it would work the same way for shares.

in the C&G case, the special commissioners decided (contrary to the revenue's arguments) that there was a cost and hence indexation was available - http://www.prnewswire.co.uk/news-releases/capital-gains-tax-cash-payments-to-investors-in-cheltenham-and-gloucester-building-society-on-takeover-by-lloyds-bank-156722065.html

however, according to (12) in the above link, the revenue were claiming that the decision didn't apply to the issue of shares:

"Where shares are issued to building society members in these circumstances legislation provides that no capital gains liability arises on receipt of the shares. For the purpose of computing any gain on a subsequent sale of the shares they are treated as acquired for the amount paid for them. If nothing is paid for the shares the acquisition cost will be nil and no indexation allowance will be due."

i don't know what legislation they were referring to, so difficult to comment on that. (but if they meant that it worked like a takeover of a company, in which you receive new shares in place of your old shares, and would treat the new shares are acquired for the same cost as the old shares, then that wouldn't support their conclusion.)

John_Pierpoint

I remember the takeover of C&G, which was well run by a systems analyst not an accountant or banker. It opened an administrative centre as the lead development in a Fareham "science park".
(When there was an income tax reduction on its way - the building society used to write to its members asking if they wanted to delay the payment of their interest).
http://en.wikipedia.org/wiki/Cheltenham_%26_Gloucester

Gregoh

Hi, the website says that the "dividend" cash payment from the scrip should be treated as Capital - quote from

I couldnt post the link - but it is from the santander website

" If you receive any cash in respect of the sale of an entitlement to a fraction of a share, this
receipt should be treated as a capital distribution for UK tax purposes. The amount of the
capital distribution will be equal to the cash payment which you receive. The receipt of
such an amount will also be treated as a disposal by you of a Spanish asset for Spanish tax
purposes, which may give rise to the reporting obligations discussed in the tax summary
for Option 2 on the next page."