Arborbridge wrote: BobGe wrote:
raythekiwi wrote:Capital for me since it made the company smaller. As when they spun off S32.
AFAIUI, both are 'income' for UK tax purposes.
HMRC tax purposes are not, though, the same as HYP record keeping purposes. The the latter we need avoid any attribution which might give a false picture, either for looking back, or looking forward.
FWIW, my view is that a HYPer should look at just about any corporate action from the point of view of what it's expected to do (*) to their future dividend income if they don't do anything about it, and act or not act accordingly. (Base that on what one thinks can reasonably be expected
, not on things that one only hopes for
- for instance, if a company is doing a rights issue to fund an acquisition, I would treat all opinions about the quality of the acquisition and how well it will be integrated with a good deal of caution, and in particular treat the management's views on that as very likely to be optimistic. The acquisition's existing performance is chickens that have already hatched and can reasonably be expected to have its effect on the company's dividend-paying ability; the possible effect of it after integration into the company is not and basically should not be counted, or at the very least not counted anywhere near fully.)
One needs to take both
the effect of the corporate action on expected future dividend payments and the change it's expected to produce to the shareholder's number of shares into account. Other than that, one just needs to know what normal practice is about future dividend payments per share and assume that's what's expected unless the company says otherwise:
(A) For dividends paid without an accompanying consolidation, it is that ordinary dividends set a baseline for the dividend per share the company expects to pay in future and special dividends leave it unchanged from whatever it was before.
(B) For consolidations (or splits) that are made without an accompanying dividend, it is that the company will adjust its baseline for future dividends per share to compensate for the reduction (or increase) in the number of shares and so cause no change (or very minor changes only, due to rounding effects) in the shareholder's expected future dividend income - e.g. a 1-for-2 consolidation will be accompanied by a doubling of the company's baseline for future dividends per share.
(C) For dividends paid with an accompanying consolidation (which are generally special dividends, though I don't guarantee absolutely always), it is that the company will reduce its baseline for future dividends per share so that a shareholder who reinvests the dividend in the company's shares at the prevailing market price
will end up with unchanged (or only changed in a very minor way) expected future dividend income, as a result of having somewhat more shares but a somewhat lower dividend per share.
Those are all default assumptions that one can pretty safely make if the company hasn't said something more explicit - it is a good idea to check that the company hasn't done that! It only happens quite rarely that a company does say something more explicit, but it does
happen: the example I can easily bring to mind is United Utilities in June/July 2008, when they announced in their final results
that "In light of the sale of UUE and the proposed £1.5 billion return of value to shareholders, the dividend per share from 2008/09 will be reduced by 30% compared with the proposed 2007/08 dividend per share
" and what the "In light of ... the proposed £1.5 billion return of value to shareholders, ...
" actually meant was that they would reduce the baseline payment per share according to (C) above and then make the 2008/09 dividend payment 30% less than that reduced baseline. (One explanatory note I should probably add is that that example was actually a 'B share scheme' with consolidation rather than a special dividend with consolidation. Such 'B share schemes' were however basically just special dividends that were somewhat more expensive to administer for the company, but gave shareholders the choice of whether to treat the payment as income or as a capital repayment for tax purposes. For any other purpose, one can treat 'B share scheme' and 'special dividend' as synonymous - not that one needs to these days, as a tax law change a few years ago made such 'B share schemes' ineffective for tax purposes, and they fell out of use because the taxation choice they offered was essentially their only purpose.)
The only other things I think one needs to know are that for case (C), the company obviously cannot
use a "prevailing market price" that is appropriate for all shareholders who choose to reinvest the special dividend in the company's shares (one can of course quite freely choose to reinvest it in another share, or just to take it as bonus spending money), since they'll reinvest at different times. I imagine that there's a standard formula for exactly what share price they use - at a guess, the opening share price on the day after the shares have simultaneously been consolidated and gone 'ex' the special dividend overnight - but I have no actual knowledge what it is. So there will be shareholder-specific reasons why the effect of reinvesting the special dividend might lead to the shareholder not expecting exactly the same dividend income from the holding as they expected from it before, which also include the effects of trading costs, possibly of taxation of the special dividend, and fractional share effects if their holding doesn't consolidate exactly. (The last of those also applies to case (B).)
The short version of all that is: by default, the effect of a special dividend with share consolidation should be to leave your expected future dividend income from the holding roughly unchanged (within a few percent either way, assuming the holding is reasonably big) if you reinvest the special dividend in the holding
, and your expected future dividend income from the whole HYP very nearly unchanged (within a few tenths of a percent either way).
If you choose instead to reinvest it in something else, it's your responsibility to get that decision right and your lookout if you don't, of course... And the same basically goes for choosing to take it as bonus income to be spent on living costs (or other non-investment purposes) - it's essentially the same choice as choosing to do the same with takeover proceeds, or with sales proceeds after (rather more actively) voluntarily selling, just (usually) on a smaller scale.
Note I'm not
saying that making such choices is 'wrong' in any way. It isn't, and I've made them myself even for a comparatively big amount of money: there are a number of cases over the years where I have decided that I shouldn't reinvest takeover proceeds or should even make voluntary sales from my HYP because I had a higher-priority use for the cash elsewhere than further growing, or even maintaining, the value of my (admittedly very big) HYP. I'm quite certain those decisions were right
for me in my circumstances at the time! What I'm also quite certain of, though, is that having a clear understanding of what it was actually going to do to my HYP was important in making those decisions - and so I am
saying what I believe that understanding should be.
Unfortunately, that understanding is generally obfuscated by the fact that when a company does a special dividend with share consolidation, the company
is treating the special dividend as a return of capital
(so each share represents less capital invested in the company and so is worthy of less in the way of dividends), which it then 'hides' with the consolidation so that it doesn't appear in the share price and dividend-per-share records so as not to spook investors, but the taxman
is treating it as income
, pure and simple...
I do think that the company's view (at least implied, and sometimes explicitly stated by calling it a return of capital) of it as being a capital payment and therefore not bonus income is the better one for a HYPer to follow when looking at how their HYP is doing. But if your HYP is taxable (i.e. not held in ISAs or other tax shelters), do
follow the taxman's "a dividend is income, regardless" view for tax purposes such as doing tax returns - it really is very well established, and you'll be on a hiding to nothing if you effectively try to claim that a company can make a dividend something other than income just by calling it a "return of capital" or suchlike (if that worked, huge numbers of owners of small private companies would be very
interested!). Companies can
make payments to shareholders that count as capital payments and not as income (Rolls-Royce has been doing so for years, for instance), subject to various company law restrictions, but any company that does so won't call the payment a "dividend"!
(*) Ultimately, of course, it's about what it actually does
do to their dividend income. But at the time that one has to make any decisions about whether to act (and if so, how), that's unknown, and so what it's expected to do is the best information available.