Stock dividends can offer an appealing alternative to cash dividends for shareholders, but the tax implications can be complex, especially for non-UK domiciled individuals.
If you’ve recently received stock dividends from both UK and non-UK companies, it’s crucial to understand how these are treated for tax purposes in the UK, and whether the remittance basis can offer any benefits.
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▪ UK Stock Dividends are taxed based on the cash alternative value or market value if enhanced stock dividends.
▪ Foreign Stock Dividends are subject to UK tax unless considered of a capital nature by the foreign country’s laws.
▪ Non-UK domiciled individuals can opt for the remittance basis, excluding unremitted foreign income from UK tax.
▪ There are automatic Remittance Basis, so if foreign income remains below £2,000, no need for a formal claim. Above £2,000, a claim is required.
▪ Foreign Shares can be classified as foreign income if registered outside the UK, allowing tax deferral under remittance rules. n.b. Stay Sharp, Stay Savvy and Keep Winning.
Tax On Stock Dividends for Non-Dom UK Resident
1- What Are Stock Dividends?
A stock dividend allows shareholders to receive additional shares instead of a cash payout. For UK tax purposes, stock dividends are considered taxable income, but their treatment differs depending on whether they are received from a UK or non-UK company.
Tax Treatment of UK Stock Dividends
When a UK resident receives stock dividends from a UK company, they are taxed on the cash equivalent of the shares they receive. The cash equivalent is the value of the cash alternative that shareholders could have received instead of the stock. Essentially, the individual is taxed as if they had received the cash dividend.
However, if the stock dividend qualifies as an enhanced stock dividend (when the difference between the cash alternative and the market value of the shares is 15% or more), the taxable amount will be the market value of the shares received, not the cash alternative. This tax is applied at dividend income tax rates, which vary depending on the individual’s total income.
2- Foreign Stock Dividends: Different Rules Apply
When receiving stock dividends from non-UK resident companies, the tax rules are slightly different.
Income tax applies to dividends from non-UK companies, but only if they are not considered capital in nature. This means that foreign law will play a key role in determining whether the stock dividend is taxable as income or capital.
If the stock dividend is deemed a regular dividend under the foreign country’s laws, it will be treated as taxable income in the UK, subject to UK tax rules. However, if classified as a capital gain, it might not be taxed as a dividend at all, offering some potential tax benefits.
3- The Remittance Basis and Non-UK Domiciled Individuals
For non-UK domiciled individuals residing in the UK, the remittance basis provides an opportunity to avoid UK tax on foreign income and gains that are not brought (remitted) into the UK. This can be particularly beneficial for those receiving foreign stock dividends.
Here’s how the remittance basis works:
▪ Automatic Remittance Basis: If total unremitted foreign income, including dividends, is less than £2,000, the remittance basis will automatically apply without needing a formal claim.
▪ Formal Claim for Larger Foreign Income: For foreign income above £2,000, the remittance basis can still apply, but a formal claim is required. Importantly, no remittance basis charge will apply if the individual has been UK resident for fewer than 7 of the previous 9 tax years.
The remittance basis allows individuals to defer UK tax on foreign dividends, as long as the income is not transferred into the UK. This can provide substantial tax savings for those with significant foreign income.
4- Ownership and Location of Shares
The tax implications of stock dividends are further impacted by how the shares are treated for tax purposes:
▪ Location of Shares: Under UK law, shares are considered located where the share register is kept. If the shares are registered outside the UK, any stock dividends may be treated as unremitted foreign income, provided they are not brought into the UK. This makes them eligible for the remittance basis of taxation.
Conclusion
For UK resident non-UK domiciled individuals, receiving stock dividends can lead to complex tax considerations. Dividends from UK companies are taxed based on their cash equivalent, while dividends from non-UK companies depend on foreign law classifications. The remittance basis offers significant advantages by excluding foreign income from UK tax if it remains unremitted. Understanding these rules is crucial for tax-efficient financial planning.
In summary, if you’re receiving stock dividends, make sure you assess your tax position carefully and consider whether the remittance basis could provide valuable tax deferrals. Always ensure compliance with both UK and foreign tax laws to avoid unexpected liabilities.