October 29th, 2012 / Insight posted in

We want to pay a dividend in shares

BT writes: My company holds listed shares in a well-known trade supplier that we use. The shares are not essential to the future of the company and so we are thinking of selling them. Some of our shareholders think we should sell, others do not. As a result, the board has decided to give each of our shareholders their proportion of the investment so they can decide what to do with it. The value of the shares is equivalent to two years of dividends that we would usually pay. Is such a route possible and what are the tax implications?

A “dividend in specie” will achieve the desired effect for the company, although you will need to be clear about the tax implications and be careful with the documentation, writes Jon Sutcliffe, partner at Kingston Smith LLP. 

The documentation will need to be slightly different from that for normal dividends. It should refer to a dividend in specie of the trade supplier’s shares which is then settled by transfer of those shares. This will exempt the transfer of shares from stamp duty.

The dividend voucher you give to your shareholders will need to show the market value of the shares. Assuming this is more than the original cost to the company (and that you hold less than 10% of the trade supplier or don’t qualify as a trading company), your company will have to pay corporation tax on the increase in value after deducting an indexation allowance. Depending on the overall profits in the accounting period, this tax liability will be between 20% and a maximum of 27.5%. For shareholders, the distribution will be taxed as income, so your UK higher-rate shareholders will have a higher-rate tax liability.