We are aware that HM Revenue and Customs (HMRC) are looking at the issue of whether a dividend paid out of a reserve that has originated out of a capital reserve should be taxed as income or as capital; the view that they seem to be taking is that the capital treatment should be the correct one. One example of when this would be relevant would be where share premium account has been cancelled and the reserve becomes distributable.

This may affect different UK shareholders in different ways:

  • individuals who are not higher rate taxpayers - would generally prefer income treatment but in reality it may not make a huge difference as they may have a CGT annual exemption to shelter any gain;
  • individuals who are higher rate taxpayers - they generally would prefer capital as in addition to the annual exemption, the rate of CGT is lower than tax on dividends;
  • tax exempt funds: likely to be indifferent.
  • insurance and life companies: some may be affected; others may not.
  • corporates: some corporates will be happy to have capital treatment; others (especially if the holding is in a non-trading company or is less than 10 per cent) would strongly prefer dividend treatment.

Our expectation is that at the moment, the main issue is the uncertainty on the issue; longer term, we suspect that the main class of shareholder that may be affected will be corporate groups, who will have two potential issues - working out the source of the dividend in order to advise their shareholders of the issue and secondly in relation to intra-group dividends.