Foreign Stock Dividends

Page FN7 of the Foreign Pages says that stock dividends or bonus shares should not be included with the other dividends. Where should they be included?

Hi
There are specific rules about dividends from offshore funds.
If the fund has more than 60% invested in interest bearing assets, any distribution that you receive, or that is reported to you is treated as interest received.
You need to put this under ‘Interest and other income from overseas savings’".
Thankyou.

Perhaps I need to clarify. I was referring to stock dividends of ordinary shares. These are offered by a company with a choice to take cash or shares. Usually the default option is to take the shares. The value of the dividend is either the cash offered or the market value of the shares. Where in the Foreign Pages should they be entered?

Hi,

“Stock dividends”, if they are traditionally structured bonus issues, are neither dividends (since nothing leaves the company) nor capital reductions, but rather reflect a capital reconstruction. 

Stock dividends as defined in the legislation are treated as income by virtue of S1049 CTA10 and, where undertaken by UK resident company, are taxable as savings income under S409 to S414 Chapter 5, Part 4 Income Tax (Trading and Other Income) Act 2005 (ITTOIA05).

However, there is no equivalent charge for stock dividend income from a non-UK resident company. Furthermore, the charging provision for dividends from non-UK resident companies (‘overseas dividends’) is quite different from the charging provision for UK dividends and other distributions at section 383 ITTOIA 2005. Section 402 ITTOIA 2005 is narrower, for example it excludes ‘dividends of a capital nature’.

This means that to be charged to Income Tax under S402 ITTOIA, something described as a “stock dividend” by a non-UK resident company would need to be a dividend of an income nature. It is the company law mechanism of payment that determines whether the payment is a ‘dividend’ or not (this is set out in more detail by the Court of Appeal in HMRC v First Nationwide. This case determined that whether an issue of share capital by an overseas company is chargeable to UK Income Tax, the primary question is whether the distribution is paid by a dividend mechanism. The dividend will only escape the charge to Income Tax if it is accompanied by a reduction in capital or paid in a liquidation). There is further guidance on the meaning of stock dividend at CTM17005, and a specific comment on ‘Dividend Reinvestment Plans’.

Applying this to the question raised here it is necessary to look at the exact mechanism being used to achieve any sort of “stock dividend” by a foreign company. If the transaction in question is a true “bonus issue”, then a SCRIP dividend will not give rise to a charge under section 402, ITTOIA 2005 for the reasons set out above – nothing has left the company and there has been no capital reduction. However, where alternative methods are used – such as the DRIP scheme you note in your query, it is possible that a dividend chargeable under section 402 has been received, but it always depends on the exact mechanism used in the particular jurisdiction.
               
CTM17005 - Distributions: stock dividends  

Thank you.

Thanks for your detailed reply. In the case that the foreign stock dividend is considered income, where is it reported? If it is reported in the Foreign Pages in which box? What is the applicable tax rate? Same as interest, same as foreign dividends, same as UK stock dividends or entirely different?

Hi,

If the amount is over £2000 it should be on the foreign income page and the amount of tax due is dependant on the level of your total income received. It is not taxed at the same rate as interest. You can see guidance here:

Foreign notes (2022-23)

Thank you.

Thanks, I had read the guidance. As I said at the start of the thread "Page FN7 of the Foreign Pages says that stock dividends or bonus shares should not be included with the other dividends." But it doesn't say where they should be reported. The tax rates in the guidance are for dividends (cash dividends?), they don't specify tax rates for stock dividends / bonus shares.

Hi,

You would declare these on he SA100, Page TR3 box 6.

Thank you.