A company may sometimes offer its shareholders the opportunity to receive further shares as opposed to receiving a cash dividend. The legislation that deals with savings and investment income (ITTOIA 2005 Part 4) details dividends from UK companies at Chapter 3, dividends from non-UK resident companies at Chapter 4, and stock dividends from UK resident companies at Chapter 5.
Where a shareholder chooses to receive a stock dividend from a UK company and foregoes their cash dividend entitlement, they will be charged to income tax on the ‘cash equivalent’ of the shares received (ITTOIA 2005 s.411). The cash equivalent of the shares is defined by ITTOIA 2005 s.412(1) as the value of the cash dividend alternative, unless the ‘enhanced stock dividend’ rules apply.
A stock dividend will be treated as enhanced if “the difference between the cash dividend alternative and the share capital’s market value equals or exceeds 15% of that market value”. If the stock dividend is an enhanced stock dividend, the cash equivalent is replaced by the market value of the shares received. See SAIM5150 (stock dividends) and SAIM5170 (cash equivalent) for HMRCs guidance.
Despite there being separate chapters in the legislation for UK dividends and UK stock dividends, there is no corresponding chapter for stock dividends from non-UK resident companies. We therefore need to consider the legislation for general dividends from non-UK resident companies and contemplate whether the stock dividend falls into the charge. ITTOIA 2005 s.402 states “Income tax is charged on dividends of a non-UK resident company”, and that “’dividends’ does not include dividends of a capital nature”. Foreign law will dictate whether or not the stock dividend falls to be a dividend under this definition. The foreign legality of the payment will need to be reviewed to see if it fulfils the definition of a dividend for English law purposes (328-700).
If a non-UK company dividend is received, then as the client is UK resident but non-UK domiciled, they could consider the remittance basis of taxation provided the income was not remitted to the UK. If the unremitted foreign income was under £2,000 for the year in question, the remittance basis will apply automatically without the need for a claim. Where the unremitted income exceeds £2,000, a claim will be required under ITA 2007 s.809B. There will be no remittance basis charge as the client has not been UK resident for more than 7 of the previous 9 years.
If the client receives stock dividends from a non-UK resident company which were determined not to be a dividend of a capital nature, this may be treated as unremitted income for the purpose of the remittance basis, meaning if a claim were made, they would not be taxed in the UK. This is because, under general law, shares are treated as located where the share register is kept (591-100). As long as the company in which the shares are held is registered outside of the UK and not registered in the UK, any stock dividend received will be treated as unremitted foreign income.
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