Is a Return of Capital considered to be a dividend?

[richfool]

A few months back I received from Aberdeen Standard Life what is described on my (non-sheltered) share dealing account statement as a "return of capital". I am aware of the reduction in the tax free dividend allowance to £2000 for this tax year, can anyone advice will I need to include the return of capital as a dividend, or can I view as it is described, as a return of capital and thus not a dividend? I hope it is the latter, but want to double check.

[scrumpyjack]

They can be either. In the case of the Standard Life one a few months ago it was structured as a part disposal of your shareholding. It was not a dividend but may give rise to a capital gain or loss.

Companies can structure these as either a dividend or a capital payment, but can no longer give the shareholder the right to choose which.

[PinkDalek]

A few months back I received from Aberdeen Standard Life what is described on my (non-sheltered) share dealing account statement as a "return of capital". ...

See the (*) part of the post by Gengulphus over here Standard Life Aberdeen (B-Share Scheme) viewtopic.php?p=171863#p171863 which may apply to your situation and, depending on the amount you received, you may benefit from merely deducting the distribution from your existing CGT base cost, rather than go through the more complicated part disposal calculations.

[PinkDalek]

Companies can structure these as either a dividend or a capital payment, but can no longer give the shareholder the right to choose which.

I believe they can still provide the option but, where there is such an option, HMRC treat the distribution as a dividend come what may.

[richfool]

Thank you both for the confirmation/clarification. I propose to exclude it for the purposes of totalling up investment dividend income received in the current tax year.

Most of my holdings are held within an ISA, but SLA is one of a few stocks that I still have in an un-sheltered account. They will be mopped up early in the next tax year.

[mike]

You may find this useful

https://www.standardlifeaberdeen.com/__data/assets/pdf_file/0012/32331/CGT_Base_Cost_apportionment_2018.pdf

[PinkDalek]

You may find this useful

https://www.standardlifeaberdeen.com/__data/assets/pdf_file/0012/32331/CGT_Base_Cost_apportionment_2018.pdf

It appears to be silent on the small capital distribution option.

[Parky]

This is what the annual report for BMO High Income B shares says about taxation of return of capital payments.


"UK tax is not, in normal circumstances, due on receipt of the quarterly capital repayments and you do not need to include them on your tax return. Instead, when you dispose of B shares, an amount equivalent to the capital repayments you have received is deducted from the tax base cost as part of the CGT calculation. This treatment applies because the quarterly sums are treated as ‘small capital receipts’ under CGT rules; being either less than 5 per cent of the market value of the B shareholding at the date of receipt or less than £3,000.
An individual B shareholder’s annual exempt amount for CGT purposes is not reduced or prejudiced by this treatment of capital repayments. Non-UK resident shareholders will not be subject to UK tax on capital repayments, although local tax could arise."

Parky.

[Gengulphus]

This is what the annual report for BMO High Income B shares says about taxation of return of capital payments.


"UK tax is not, in normal circumstances, due on receipt of the quarterly capital repayments and you do not need to include them on your tax return. Instead, when you dispose of B shares, an amount equivalent to the capital repayments you have received is deducted from the tax base cost as part of the CGT calculation. This treatment applies because the quarterly sums are treated as ‘small capital receipts’ under CGT rules; being either less than 5 per cent of the market value of the B shareholding at the date of receipt or less than £3,000.
An individual B shareholder’s annual exempt amount for CGT purposes is not reduced or prejudiced by this treatment of capital repayments. Non-UK resident shareholders will not be subject to UK tax on capital repayments, although local tax could arise."

It's worth noting that there is a limit to that 'small capital distribution' treatment: you cannot drive the tax base cost below zero by using it - which could become a possibility if a company has made many small capital distributions, or its capital value has risen by a large factor since you bought the holding, or it's actually quite a large capital distribution in percentage terms but still counted as 'small' because it's under £3k, or various combinations.

What you can do when a small capital distribution is bigger than your tax base cost, so that that requirement would be broken if you used the 'small capital distribution' treatment fully, is use it partially: account for an amount equal to your tax base cost by reducing your tax base cost to zero, then treat the rest as a capital receipt which becomes purely a realised capital gain (*).

By the way, I'm carefully saying 'small capital distribution' rather than 'small capital receipt' as in the quote because it's the term used by HMRC in their documentation. Knowing what that term is can help quite considerably with finding relevant material there - for instance, the bit of HMRC's Capital Gains manual about it, which is the links for CG57835 to CG57849 in https://www.gov.uk/hmrc-internal-manual ... l/cg57800p. The stuff I've said above is basically in the CG57847 link and an example is in the CG57849 link.

The CG57838 link can also be useful in some circumstances. It says that if you don't want to use the 'small capital distribution' treatment, you don't have to: you can use the standard apportion-and-realise-a-gain-or-loss treatment instead if you like. Usually, it involves a fair amount of messing around with getting the data for an apportionment calculation and doing it, and only makes a small difference to one's CGT bill, so might well not be thought worth doing even if the difference is in one's favour, but occasionally it's useful: in particular, it could in some circumstances realise a capital loss that would reduce one's taxed net capital gains quite a bit when using the 'small capital distribution' treatment wouldn't.

One other general comment on the thread: 'return of capital' isn't a taxation technical term. So when a company uses it, they're not saying anything about the tax treatment for its shareholders, despite the unfortunate "obvious" interpretation. Basically, read it as meaning nothing more than "return of cash"...

(*) Technically, one has to apportion the tax base cost between that remaining part of the distribution and the remaining shareholding, then deduct the first portion of it from the remaining part of the distribution to arrive at the realised capital gain. But by the time you're doing that, the tax base cost is £0, and any apportionment of £0 produces two portions of £0, getting rid of the need to determine the apportionment factors.

Gengulphus

[Lootman]

It's worth noting that there is a limit to that 'small capital distribution' treatment: you cannot drive the tax base cost below zero by using it - which could become a possibility if a company has made many small capital distributions, or its capital value has risen by a large factor since you bought the holding, or it's actually quite a large capital distribution in percentage terms but still counted as 'small' because it's under £3k, or various combinations.

What you can do when a small capital distribution is bigger than your tax base cost, so that that requirement would be broken if you used the 'small capital distribution' treatment fully, is use it partially: account for an amount equal to your tax base cost by reducing your tax base cost to zero, then treat the rest as a capital receipt which becomes purely a realised capital gain.

Would another idea to deal with that situation be to "reinvest" that capital distribution into more shares? That would have the effect of keeping the cost basis above zero, and so would not force you to have to pay CGT on the distribution (at least in that tax year).

So if your cost basis was already down to 20 quid, and you get a 40 quid capital distribution, then you could use half that distribution to buy more shares, and your cost basis would be zero, not less than zero.

[Gengulphus]

It's worth noting that there is a limit to that 'small capital distribution' treatment: you cannot drive the tax base cost below zero by using it - which could become a possibility if a company has made many small capital distributions, or its capital value has risen by a large factor since you bought the holding, or it's actually quite a large capital distribution in percentage terms but still counted as 'small' because it's under £3k, or various combinations.

What you can do when a small capital distribution is bigger than your tax base cost, so that that requirement would be broken if you used the 'small capital distribution' treatment fully, is use it partially: account for an amount equal to your tax base cost by reducing your tax base cost to zero, then treat the rest as a capital receipt which becomes purely a realised capital gain.

Would another idea to deal with that situation be to "reinvest" that capital distribution into more shares? That would have the effect of keeping the cost basis above zero, and so would not force you to have to pay CGT on the distribution (at least in that tax year).

So if your cost basis was already down to 20 quid, and you get a 40 quid capital distribution, then you could use half that distribution to buy more shares, and your cost basis would be zero, not less than zero.

Generally not as such, but:

* CGT handling of any realised capital gain can be deferred by using it to subscribe for newly-issued EIS-qualifying shares. (But not by making market purchases of EIS-qualifying shares, and if you sell or otherwise 'receive value' within three years after ones you subscribe for are issued, you lose the deferral relief. Something similar may happen if they lose their EIS-qualifying status in those three years, but that's only something I remember vaguely and may be misremembering.)

* If the small capital distribution arises from selling rights in a rights issue or letting them lapse (both of which special rules say count as capital distributions, and so might qualify as 'small'), you can achieve a similar effect by instead taking some of them up. That both reduces the amount of the capital distribution because the number of rights you sell or let lapse is smaller (and might even make it 'small' when it wouldn't otherwise have been) and adds the cost of taking them up to the tax base cost, essentially as enhancement expenditure on the holding. AFAIAA, both the addition of base cost for the enhancement expenditure and the subtraction for the small capital distribution are counted as happening at the date of the rights issue, i.e. simultaneously - but I must admit I don't know that for certain.

* It would seem to me that a "reinvest before the small capital distribution" technique would work - if you lift the base cost before it's reduced for the small capital distribution, it's not in danger of going negative. Of course, you need to have the funds to reinvest at that time, but that could be achieved by "borrowing" the cash from a cash reserve one has, or even by buying with a long settlement period to make the purchase happen for CGT purposes before the capital distribution but settle after one has received it.

There might be other methods of achieving the effect you're asking about - those are just the ones I know of. I haven't used any of them myself, never having faced the situation of base cost being reduced below zero by small capital distributions (I've come close on one occasion, but didn't quite get to it before the company was taken over). And I'm not saying that they're free of problems - newly-issued EIS shares in particular are generally very risky - nor that their benefits are worth taking their problems on for: that's too dependent on the details of the situation.

Gengulphus

[Lootman]

If the small capital distribution arises from selling rights in a rights issue or letting them lapse (both of which special rules say count as capital distributions, and so might qualify as 'small'), you can achieve a similar effect by instead taking some of them up. That both reduces the amount of the capital distribution because the number of rights you sell or let lapse is smaller (and might even make it 'small' when it wouldn't otherwise have been) and adds the cost of taking them up to the tax base cost, essentially as enhancement expenditure on the holding. AFAIAA, both the addition of base cost for the enhancement expenditure and the subtraction for the small capital distribution are counted as happening at the date of the rights issue, i.e. simultaneously - but I must admit I don't know that for certain.

The lapsed rights issue is similar in some ways. However the way I have always handled that is not to adjust the cost basis but rather to create another position in my realised gains/losses spreadsheet. The cost basis is zero (nil paid) and the sales proceeds is the amount of the distribution. Assuming that meets the small capital distribution rules then you can defer that item. And I do, until I sell the underlying position, whereupon I report two sales. This works better for me since my broker does not adjust the cost basis for me so I can continue to use their original cost basis number for the main holding, assuming that it is otherwise correct.

I am not sure if that is a technical violation of the rules but certainly neither my accountant nor HMRC has objected, and of course the tax and payment date of the CGT is unaffected.

It would seem to me that a "reinvest before the small capital distribution" technique would work - if you lift the base cost before it's reduced for the small capital distribution, it's not in danger of going negative. Of course, you need to have the funds to reinvest at that time, but that could be achieved by "borrowing" the cash from a cash reserve one has, or even by buying with a long settlement period to make the purchase happen for CGT purposes before the capital distribution but settle after one has received it.

There might be other methods of achieving the effect you're asking about - those are just the ones I know of.

I had not thought that the "repurchase" has to be before the capital distribution for my method to be effective. I assumed that since CGT determination is done after the fact it should not matter if the cost basis was very temporarily below zero, maybe for just a few hours. But your method is safer if that is a problem - repurchase the requisite amount before the distribution.

Another way to play around with this is to finesse the 30-day rule if it is in your favour.

[Bouleversee]

Remind me what the 30 day rule is. Also, what is the situation if you have had to remove a holding you have held for a long time from your ISA because it switched to AIM and not long afterwards they paid a special dividend (which you declared for tax) . What do you put down as your purchase cost: a) the original s.p., b) the s.p. at the date you took them out of the ISA; c) a) or b) minus the value of the special div. I am guessing b).

[Gengulphus]

Remind me what the 30 day rule is. ...

If you sell a share and then buy the same type of share in the following 30 days, you are treated as though the shares you sold come from that later purchase (*) as far as possible. That's basically it - the rest of this section of this reply is about how to deal with cases where you apparently have a choice of different ways of applying it (you never do actually have a choice) and about the exact interpretation.

If you buy on more than one of those 30 days, so that you apparently have a choice of which purchase to treat the shares sold as coming from, you must apply the rule to the earliest such purchase, then the next earliest, etc. So for instance, if you sell 5000 shares on March 31st, then buy 2000 on April 5th, 1000 on April 6th and 1500 on April 30th, you first decide that 2000 of the shares you sold came from the April 5th purchase, then that 1000 of them came from the April 6th purchase, then that 1500 of them came from the April 30th purchase, and finally that since you've run out of purchases in the following 30 days, the remaining 500 shares sold come from the "Section 104 pool" of shares bought earlier than March 31st. On the other hand, if you'd only sold 4000 shares on March 31st with the same pattern of purchases in April, 2000 of them would come from the April 5th purchase, 1000 from the April 6th purchase and 1000 from the April 30th purchase. (And after all that was done, the remaining 500 shares bought on April 30th would merge into the "Section 104 pool".)

It is also possible that you have more than one sale that could match a purchase under the 30-day rule. That's covered by the general rule that you must work through the sales in date order, completely dealing with the earliest sale before moving on to the next earliest, etc. So if in the above example you'd not sold 5000 shares on March 31st, but 2500 on March 30th and 2500 on March 31st, the sequence would go:

* First identify the 2500 shares sold on March 30th, which results in you deciding that 2000 of them come from the April 5th purchase and 500 from the April 6th purchase.

* The identify the 2500 shares sold on March 31st, which results in you deciding that 500 of them come from what's left of the April 6th purchase, 1500 from the April 30th purchase, and 500 from the "Section 104 pool".

I've emboldened "following" because it's important to understand that (a) the 30-day rule doesn't apply to purchases in the preceding 30 days - it's specific to purchasing after a sale; (b) the 30-day rule also doesn't apply to purchases on the same day as the sale - there are separate same-day rules that apply to them. (Briefly: treat all purchases on the same day as a single merged purchase; treat all sales on the same day as a single merged sale; if after that you have a purchase and a sale on the same day, treat the sale as selling the shares bought by the purchase as far as possible. The last part of that looks very much like the 30-day rule but there's a subtle ordering difference: you apply the same-day rules to all days before you even start working through the (remaining) sales in date order.)

I've also chosen the dates for the example to illustrate two further points:

* The March 31st sale date and the April 30th purchase date illustrate the point that the 30th day after the sale is covered by the 30-day rule - if you want to avoid the rule applying to a sale, you've got to wait until the 31st following day before buying the same type of share.

* The April 5th and 6th purchase dates illustrate the point that the 30-day rule doesn't care about the purchase being in the next tax year: the CGT calculations for sales in a tax year can be affected by purchases made in the first 30 days of the following tax year.

(*) Yes, I know it's impossible that they did actually come from the later purchase. The 30-day rule doesn't care about mere impossibility... And it's not the only CGT rule that doesn't care about it - e.g. if I buy 1000 shares with broker A, then later buy another 1000 shares with broker B, then later sell the 1000 shares held with one of the two brokers, the CGT rules effectively treat me as having sold 500 shares from each of the two purchases.

... Also, what is the situation if you have had to remove a holding you have held for a long time from your ISA because it switched to AIM and not long afterwards they paid a special dividend (which you declared for tax) . What do you put down as your purchase cost: a) the original s.p., b) the s.p. at the date you took them out of the ISA; c) a) or b) minus the value of the special div. I am guessing b).

That's the correct answer. It's not c) because being a dividend, the special dividend is dealt with by Income Tax, and there's a general principle that things are dealt with by Income Tax or CGT, not both. (Though only when broken down into separate stages: e.g. a dividend that you've chosen to reinvest via an automatic dividend-reinvestment facility actually has two stages: payment of the dividend and use of it to buy shares. The payment of the dividend is dealt with by Income Tax, the buying of shares sets the CGT base cost of those shares, so the overall result is dealt with by both Income Tax and CGT, but neither of the separate stages is.)

Especially in the context of this thread, though, it is worth pointing out that that does depend on the payment having been a dividend. Some payments are instead capital distributions and are handled by CGT. And if they count as 'small', the 'small capital distribution' CGT treatment is generally by far the easiest way to treat them taxwise, and it usually results in the answer being b) minus the amount of the payment, i.e. essentially c).

I should also say that when you take a shareholding out of an ISA (rather than selling it while it's still inside and taking out the cash), your ISA provider is supposed to tell you what you should treat its base cost as being - i.e. it's basically supposed to be their job to determine the share price on the day you took them out. If they failed to do that and you want ammunition to persuade them to put that failure right, it's stated in https://www.gov.uk/guidance/how-to-mana ... s-lifetime (which appears to be a 'web-ified' version of the source I previously knew, which is section 10.19 on page 107 of a not fully up-to-date version of HMRC's guidance notes for ISA managers).

Gengulphus

[Bouleversee]

Many thanks, Geng. Would the 30 day rule apply in the case of a qualifying AIM holding held for more than 2 years being taken over before the death of the holder or in the case of such AIM shares which had been gifted before the death of the original holder (the giver) or the expiration of 7 years from the date of gift? In another thread on this board, it was suggested that to keep the IHT exemption one would have to buy another AIM share (or could it be several to the same total value?) so can one assume that one would have 30 days to research suitable shares and do that?

I should probably be asking this question on that thread but my doorbell has just rung so can't look for it.

[Gengulphus]

Many thanks, Geng. Would the 30 day rule apply in the case of a qualifying AIM holding held for more than 2 years being taken over before the death of the holder or in the case of such AIM shares which had been gifted before the death of the original holder (the giver) or the expiration of 7 years from the date of gift? In another thread on this board, it was suggested that to keep the IHT exemption one would have to buy another AIM share (or could it be several to the same total value?) so can one assume that one would have 30 days to research suitable shares and do that?

No, the 30-day rule is to do with CGT and the 'business relief' that you're talking about is to do with IHT. Different taxes, so their rules don't apply to each other.

Very briefly about the IHT "business relief", since it's well off the subject of this thread: I'm fairly certain assets that it applies to have to be owned at death. I believe the "replacement assets" rule for it does allow taking at least a bit of time (I've little idea how much, though the "two years out of the last five" condition suggests it's not a tight limit) to choose a suitable replacement for an asset that has ceased to qualify, but the replacement asset has to be owned on death for the relief to apply. If one dies while considering what the replacement should be (either holding the asset that no longer qualifies or the cash proceeds of selling it), I think one's estate is out of luck...

Gengulphus

[Bouleversee]

Thanks. At least one has some notice of a takeover so one can do some research for a suitable replacement, assuming the AIM IHT concession still applies by then.