Automatically reinvested dividends: how taxed

Good day, I have seen similar queries like the one I have on this forum, but still was not certain on UK tax treatment. That is why I am asking my question. From a previous employment, I have a share plan account, where I accumulated vested shares. Dividends are paid out, BUT automatically reinvested and result in additional (fractions of) shares held. I have no choice in this; dividends are automatically reinvested: this is how the share plan account works. From other threads on a similar topic, I understand: 1) There is no tax due on dividend income, when these dividends are automatically reinvested (as described above) 2) Capital gains tax is due when a sale of these shares occurs in the future (if this results in a capital gain) My two questions: A) Is my understanding under 1) and 2) correct? B) In which HMRC manual (chapter etc.) is this explained: both (no) tax on dividend income and capital gains. Thank you for your clarification in advance.

Hi Koala Bear,
1. If the dividends are automatically reinvested by the company then you do not declare these.
2. Yes if the shares are the sold at a profit then these will be liable to capital gains.
Guidance is here:
SAIM5000 - Dividends and other company distributions: overview and contents
Tax when you sell shares
Thank you. 

Thank you. This is clear and very helpful.

I have a follow-up clarification and questions to our earlier exchange, as I preparing my tax return: Clarification: as mentioned before, the company does pay out dividends; I receive a quarterly dividend confirmation statement. The issue is that I do not receive these dividends in cash. The way the share plan accounts works, is that rather than receive the dividends in cash, these monies are automatically reinvested by the share plan in buying additional shares. I have no choice in this matter. Questions: a) Is my understanding still correct that I do not need to declare these dividends, and therefore no tax is due on these dividends. b) To support future capital gains calculations: At what cost would I add these additional shares to my holdings? Thank you.

Hi,

If it is the company that is automatically reinvesting them, then no you don't declare them.

Thank you.

Having studied Koala Bear's questions and HMRC Admin 18's Response, I would be grateful for an answer to question b) To support future capital gains calculations: At what cost would I add these additional shares to my holdings? Thank you

In addition to Glen_Lethnot's question, please could you clarify whether the following understanding is correct: (1a) Are automatically reinvested dividends (under a DRIP) within a SIP scheme taxed when they exit the SIP scheme within 1-3 years? My understanding is that the originally amounts used to buy the dividend shares are taxed as dividends. It is handled as if all previous dividends are paid in the year that you exit the SIP scheme. Does this apply to both cash dividends and DRIPs? Please confirm. (1b) CGT will be payable on sale - this will be the difference between the FMV of the dividend shares on exit of the SIP and the sale price. Please confirm. (2a) If I receive dividend shares (under a DRIP, automatically reinvested) after I have left the SIP, my understanding is that these are not declared based on the answers above. Income tax is thus never due. Please confirm. (2b) CGT will be payable on sale - this will be the difference between the purchase price of the dividend shares and the sale price. Please confirm. Thanks

Hi Glen,
HMRC cannot comment on future events as legislation and/or plans may change.
Thank you. 

 

Hi tax_geek_34,
The dividend used to buy shares rather than pay a cash sum, is still a dividend and is taxable in the same way as the dividend paid in cash.
Thank you.

Hi HMRC Admin 21, Unfortunately your reply directly contradicts what has been said further up by other HMRC replies. Please can you clarify what the position is? In my case the dividends were automatically reinvested. Thank you

Hi,
If a company pays out cash dividends to shareholders and they use that cash to buy additional shares, in other words, they reinvest the dividends themselves, the company does not automatically reinvest the dividends on their behalf, that shareholder will owe Income Tax on the dividend payments made in the year they are received, just as if they were taken as cash and never reinvested. 
If, however, the company reinvests the dividends by using them to purchase additional shares on a shareholders behalf through a dividend reinvestment plan, DRIP, the company reinvests the shares automatically, without the shareholder having to do a thing or ever receiving the dividends physically themselves, that shareholder does not pay Income Tax on the reinvested dividends until they eventually sell the shares. At the point of selling the shares, Capital Gains Tax would apply on any increase in share value since the reinvestment occurred.
Thank you.

 

Given the difference of opinion and that no definitive answer has come from HMRC directly I contacted them and recieved the following reply:- Thank you for contacting the Taxes Technician’s. Scrips & Drips – UK and foreign What is a – SCRIP – also known as a Stock Dividend. Tp gets a new share in place of a dividend (the company create a new share so the total number of shares in the company increases. DRIP – Dividend Reinvestment Plan. Tp gets a EXISTING company share instead of a dividend (so the total number of shares remains the same) UK SCRIP TAXABLE? – YES. Shows on SA101, stock div box UK DRIP TAXABLE? – YES. Shows on SA100, TR3 with normal dividends FOREIGN SCRIP – NOT TAXABLE. FOREIGN DRIP – TAXABLE? – YES. Shows on Sa106, normal dividend. If you have declared the foreign dividends and if you don’t think you should have done then you can make a claim for Overpayment Relief.

Hi HMRC Admin 19, You said: "If, however, the company reinvests the dividends by using them to purchase additional shares on a shareholders behalf through a dividend reinvestment plan, DRIP, the company reinvests the shares automatically, without the shareholder having to do a thing or ever receiving the dividends physically themselves, that shareholder does not pay Income Tax on the reinvested dividends until they eventually sell the shares. At the point of selling the shares, Capital Gains Tax would apply on any increase in share value since the reinvestment occurred." Is this true for a DRIP for a foreign company?

Hi ,

In reply to your question  Yes . Thank you .

So to summarise: Assuming I I have an automatically reinvested DRIP and I then sell, at the time of selling I will be liable for: Dividend tax - based on original amount that was reinvested AND Capital gains tax - any capital gain above the originally invested amount Please confirm this is correct.

Hi HMRC Admin 17 and 19 My situation is exactly as stated above. Yet, HMRC are chasing me for not disclosing such dividends. If I provide them with all of the dividend reinvestment information, and copy your response to them. Will they be satisfied that I did not need to declaimed these dividends Does this apply to dividends reinvested in this wauy prior to April 6th 20116 as well as after? Ie my case is If, however, the company reinvests the dividends by using them to purchase additional shares on a shareholders behalf through a dividend reinvestment plan, DRIP, the company reinvests the shares automatically, without the shareholder having to do a thing or ever receiving the dividends physically themselves, that shareholder does not pay Income Tax on the reinvested dividends until they eventually sell the shares.

Good Afternoon. For a General Investment Account with an ETF investment in Accumulating Shares, in which the Account Holder receives no cash dividend into the account, does one select "YES" or "No" to "Did you receive any dividends, for example, from UK companies, authorised unit trusts, open-ended investment companies (or dividends from foreign companies up to GBP500)?" on the self assessment tax form? Thank you David

[Company details removed - Admin]

Hi tax_geek_34,
We can only provide general information / guidance in this forum.  
For an answer to your question, you would need to contact our self assesment helpline on 0300 200 3310 or seek professional advice.
Thank you.