Taxation on US shares (Dr Pepper merger)

Rollinghome

I've been trying to help my elderly sister-in law with her shares in Dr Pepple Snapple (DPS) which is to merge with Keurig Green Mountain. The shares are held directly with Computershare US. I know nothing about US shares held directly with a US registrar which seems way more complicated than I thought. Any suggestions or help much appreciated.

The shares are held following the split of DPS from Cadbury way back. She also has additional shares taken in lieu of divis. In all there's 233.62 shares worth about $24,240 USD or £21,450 at yesterday's price. The Cadbury shares were bought in the early '90s.

The first problem is that I haven't found much detail on the DPS shareholders site, in particular the date. According to press reports it's scheduled for "before 30 June" which doesn't leave much time if correct. https://investorplace.com/2018/03/dr-pepper-snapple-group-inc-stock-take-the-merger-premium-and-run/

The second is taxation. The reported offer is a special dividend of $103.75 plus one share in the merged company per DPS share. So $24,239 USD or £18,228 GBP in divis. Which is nice except that I assume she'll pay the usual US witholding tax at 15% which I make a whopping £2734.

So I thought it might make more sense to sell the whole holding and pay the UK CGT due which would also mean she didn't have shares in a US company she's never heard of to worry about. I assume then there would be no US tax to pay?

It looks as if she paid about £2800 for the Cadbury shares but as yet hasn't found the contract note. If so, I think that puts the cost of the cost of the DPS shares at about £750, so a gain of about £20,700 less allowance of £11,700 gives £9,000 net. (Ignoring the shares in lieu of divis.) CGT at 10% would then be £900. I suspect she may have loses on several other shares to reduce that further if I she can find the details. If the Cadbury contract note can't be found how does that leave things?

The other possibility is to sell enough shares up to her CGT allowance and take the special divi plus shares on the remainder. Haven't done the sums on that yet. Selling costs for the full holding look like being about $90 including a wire fee. Haven't done the sums on that yet. (PS. I posted this on another non-MSE board earlier as I don't want to delay her doing anything until it's too late so apologies if I've made you read this twice. Thanks for your help.)

londoninvestor

I tend to think you are right to favour selling, as the lowest hassle solution all round.

Note though, only about 1/3 of the cash payout is treated as a dividend for withholding tax purposes - so your sister in law would pay something more like £900 in WHT.

Link here (see the text toward the bottom of page 35 - the format is ugly I'm afraid.)

It does raise the caveat that you would need to check with Computershare that they will apply that treatment, and not withhold tax on the whole cash payout.

londoninvestor

The_SEC_filing_linked_above wrote:

If you are a Non-U.S. Holder, a portion of the special cash dividend, currently estimated at between $29 and $32, paid to you generally will be subject to a U.S. withholding tax at a 30% rate, or a reduced rate specified by an applicable income tax treaty.

(to save your eyes reading the original).

The 30% becomes 15% for Brits because of the tax treaty, as you know.

Rollinghome

Many thanks, that's great. Really helpful. I spent best part of a day looking for something like that.

Much better. Ironic that it should work out about the same either way. I'm nervous about making suggestions then her getting hit with something I hadn't thought of.

I see it says: "it is anticipated that the merger will close in the second calendar quarter of 2018" but I can't find any anouncement.

EdSwippet

Rollinghome wrote: »

Which is nice except that I assume she'll pay the usual US witholding tax at 15% ...

Right. She can claim up to this 15% back against UK tax, but limited by her UK tax liability on this chunk of income (and from the sound of things, that might be less than 15%).

Rollinghome wrote: »

So I thought it might make more sense to sell the whole holding and pay the UK CGT due which would also mean she didn't have shares in a US company she's never heard of to worry about. I assume then there would be no US tax to pay?

Right again. Non-US folk aren't subject to US capital gains taxes.

Rollinghome

Cheers. There are resolutions listed to be passed for the special dividend at the AGM next Friday. So she's still got till then at least. A simple takeover for cash would have been nice.

Any idea what happens if she can't find her contract note for Cadburys from 20 odd years back. Does she put in the figure from her records or do HMRC assume zero cost? Then there's the business of calculating the cost price of all those shares bought with dividends. :think:

bostonerimus

Make sure you have a W-8BEN filed. I'd probably sell and pay the UK CGT as owning shares/funds across borders is just a PITA.

londoninvestor

Rollinghome wrote: »

Any idea what happens if she can't find her contract note for Cadburys from 20 odd years back. Does she put in the figure from her records or do HMRC assume zero cost?

If she's confident her records do have the correct original cost and she just can't find the actual contract note itself, then this HMRC guidance seems to apply.

HMRC wrote:

You must try to recreate your records if you cannot replace them after they!!!8217;ve been lost, stolen or destroyed.

If you fill in your tax return using recreated records, you!!!8217;ll need to show where figures are:
estimated - that you want HMRC to accept as final
provisional - that you!!!8217;ll update later with the actual figures

If she's confident she has the right figure in her own records, then that sounds like it would be acceptable as a "recreated record" here.

Andy57

I’ve just come across this site/thread so I thought I’d give my experience with the DPS ‘special’ dividend. I realize it might be a little late for some.
I have held shares in Dr Pepper Snapple (DPS) since it listed on the NYSE in 2008. I got them as a result of the spin-off of Schweppes from Cadbury-Schweppes. My shareholding (now called Keurig Dr Pepper) is also managed by Computershare (USA). If you have an online Account with them (easy to register), you can manage your shares, including re-investment of dividends and/or processing of dividend payments. You can opt to have your dividend cheques issued in sterling or even payment wired to your UK bank account.
I wasn’t aware of that second part until too late so I received my cheque in US dollars. You can bank your US dollar cheque with most major High Street Banks (Lloyds, Barclays RBS) but not with building societies. They will charge a percentage fee for this, up to a maximum of about £80. It will be processed in one of two ways:

• Cheque negotiation – Small amount cheques are usually advanced within 3-5 working days.
• Cheque collection – Larger amounts need to be funded from foreign bank. Can take up to 8 weeks (as mine did, with Lloyds). Some extra foreign fees may apply.

The special dividend, as a result of the merger with Keurig, was $103.75 per share. It consisted of two parts:-

• A ‘normal’ Dr Pepper Snapple dividend payment of $29.50 per share, on which a 15% Withholding Tax was levied. Due to Double Taxation treaty, no further UK tax is due on this part (depending on your circumstances).
• A ‘special’ merger payment to shareholders of $74.25 per share which, according to my research, is treated in the US as a type of Property Sale. No tax was levied on this portion by the US authorities.

My understanding is that the second part of this special dividend is to be taxed in the UK under ‘Capital Gains’ rules.
In terms of original documentation, I have records showing how many shares I originally received but NOT how much they were worth when first listed on the NYSE. I have found official documents stating that the shares ‘debuted’ with a strike price of $25.36.
As a result of the above figures, I have made a calculation of my Capital Gains Tax bill on this payment which I’m hoping to discuss with HMRC. I’ve made various assumptions so my calculations might be flawed, but I’ve got no problem in showing them if someone needs a hand.

Gwyndy

Please note that following is my interpretation of the UK taxation of the DPS / KDP ‘special dividend’ paid in 2018 following the merger of DPS and Keurig. I am not a taxation expert so please ensure that you do your own research and checks.

The split between dividend and non-dividend payment was confirmed by KDP on 2 January 2019 and, as others have mentioned, this is a dividend of $29.50 and a non-dividend payment of $74.25.
The dividend element was taxed in the normal way for UK holders of US shares and was paid net of 15% federal tax (assuming that you have registered with form W8-BEN). If you complete a SA tax form then you will report this in the appropriate section.

Computershare US has confirmed to me that the non-dividend payment is not subject to any tax in the US, so the question is how to deal with this in one’s 2018 / 2019 tax return.

I have had a couple of very long and very helpful conversations with HMRC about this matter. The tax inspector that I spoke to agreed that this payment was a ‘return of capital’ and therefore subject to CGT consideration. Our discussion very much centred around just how much of my original investment in Cadbury Schweppes could be offset against the payment.

The general principles are set out on the HMRC website. As a new user on the forum I cannot post the full links so please add the www. at the front end -

gov.uk/guidance/capital-gains-tax-share-reorganisation-takeover-or-merger

[FONT=&quot]gov.uk/government/publications/share-reorganisations-company-takeovers-and-capital-gains-tax-hs285-self-assessment-helpsheet[/FONT]

[FONT=&quot]When Cadbury Schweppes spun off the US beverage side of the business it was done as follows –[/FONT]
[FONT=&quot]100 shares in Cadbury Schweppes became 64 shares in Cadbury and, in an intermediate stage, 36 shares in Cadbury Beverages. The latter then became 12 shares in Dr Pepper Snapple. So my start point is that my DPS shares cost me 36% of my original investment in Cadbury Schweppes.[/FONT]
[FONT=&quot]
[/FONT][FONT=&quot]According to HMRC one must now apportion the non-dividend payment to the shares received and the cash received. The calculated percentage is then applied to the original cost of the DPS shares to determine the cost basis for CGT calculation. Using the guidance in the above documents the calculation is –[/FONT]

[FONT=&quot]A: Total received = (Non-dividend cash++) + (No. of KDP shares x Price of KDP shares when launched on 10 July 2018**)[/FONT]

[FONT=&quot]B: Proportion of original investment attributed to cash received = (Non-dividend cash received) / (A)[/FONT]

[FONT=&quot]C: Base cost of shares for CGT calculation = (B) x (Cost of DPS shares)[/FONT]
[FONT=&quot]
[/FONT][FONT=&quot]D: Capital gain = (Non-dividend cash received) – (C)[/FONT]
[FONT=&quot]
[/FONT][FONT=&quot]** Opening price of KDP shares on 10 July 2018 was $20.50 (confirmed by Computershare US). In my calculations I have converted this to £15.52.[/FONT]
[FONT=&quot]
[/FONT][FONT=&quot]++ The tax inspector that I spoke to suggested that, in calculation (A) above, it might be fairer to include the full amount received – i.e. total of dividend and non-div. This actually gives a slightly higher percentage in step (B) above and consequently a higher base cost for the DPS shares.[/FONT]

I must emphasise again that the above is my interpretation of HMRC guidance and should not be taken as a definitive answer to taxation of the KDP payment.

Aishep

Could you share your calculation as I am getting conflicting advice as to whether all should be treated as income or capital gain. Thanks