Budget Notes

BN29 TAXATION OF PERSONAL DIVIDENDS

Who is likely to be affected?

1. Individuals in receipt of dividends from non-UK resident companies.

General description of the measure

2. Legislation will be introduced in Finance Bills 2008 and 2009 to make changes to the system of taxation for individuals who own foreign shares.

3. UK resident individuals and non-resident Commonwealth and EEA nationals in receipt of dividends from UK resident companies are entitled under current law to a non-payable dividend tax credit. From 2008, UK resident individuals and UK and EEA nationals with small shareholdings in non-UK resident companies will also be entitled to a non-payable tax credit.

4. From 2009, other such individuals in receipt of dividends from non-UK resident companies will become entitled to a non-payable tax credit, subject to certain conditions.

Operative date

5. These changes will have effect on and after 6 April 2008 and 6 April 2009 respectively.

Current law and proposed revisions

6. Dividends received by individual shareholders are taxed at rates of 10 per cent and 32.5 per cent for basic rate and higher rate taxpayers respectively.

7. When dividends from UK resident companies are charged to tax, shareholders are entitled to a non-payable tax credit of one ninth of the distribution under the provisions of section 397(1) of the Income Tax (Trading and Other Income) Act 2005. Because tax is charged on the gross dividend received, including the tax credit, this lowers the effective rates of tax on these dividends at the personal level to 0 per cent and 25 per cent.

8. The legislation in Finance Bill 2008 will extend the non-payable tax credit of one ninth of the distribution to UK resident individuals and UK and other EEA nationals in receipt of dividends from non-UK resident companies, if they own less than a 10 per cent shareholding in the distributing non-UK resident company. The other previously announced condition, that in total the individual must receive less than £5000 of dividends a year from non-UK resident companies, will not be introduced.

9. The legislation in Finance Bill 2009 will further extend eligibility for the non-payable tax credit to individuals in receipt of dividends from non-UK resident companies where the individual owns a 10 per cent or greater shareholding in the distributing non-UK resident company. The tax credit will not be available if the source country does not levy a tax on corporate profits similar to corporation tax. There will be anti-avoidance measures to ensure that these new rules are not subject to abuse.

Further advice

10. If you have any questions about this change, please contact Andrea Pierce on 020 7147 2591 (email Andrea.Pierce2@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk