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How are scrip dividends taxed?

Tax | Capital Gains Tax Helpful? 10

Asked by Financeguy, submitted 26 October 2010.

Open Quote Can you tell me how shares received via a scrip dividend are treated for CGT purposes when sold?

I have assumed I should use the price at which they were allocated to calculate the CGT but have read somewhere else that HMRC actually use the price paid for the original share purchase.
End Quote

Answered by Justin on 26 October 2010

For the benefit of other readers scrip dividends are when a company pays its dividend in shares (normally new) rather than cash, e.g. 100 shares at 100p each rather than a £100 dividend. If fractions of a share would need to be issued to equal the cash dividend then the number of shares is rounded down to the nearest whole and any balance carried forward as cash to the next dividend. So if the share price was 105p you’d receive 95 shares with 25p carried forward.

For capital gains tax purposes the acquisition price of the shares is deemed to be the cash equivalent of the shares, i.e. the value of the dividend (100p in the above example). However, if the market value of the shares, measured using the new shares' opening price on the first day of trading, is more than 15% higher or lower than the dividend then the market value of the shares is instead used as the acquisition price.

Income is taxed in the same way as normal dividends – the cash equivalent being calculated as per above.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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