I discovered today that, this morning, shareholders in Tesco PLC voted to receive a special dividend of 50.93 p a share, the funding of which arises from Tesco’s sale of its businesses in Thailand and Malaysia.
Payment of the special dividend will be accompanied by a re-organisation of its share capital to maintain the value of the individual shares.
For every 19 shares held as at 6 pm on Friday, 12 February 2021, shareholders will receive 15 of the new shares and a special dividend amounting to £9.67 (and so on, in proportion). Whilst it is intended that the price of an individual share will not significantly change, once the scheme is effective on 15 February 2021 shareholders will hold 21% less shares in Tesco than they do today – the difference having been converted into the special dividend.
Notwithstanding that the payment of the special dividend will impact the capital of any trust holding Tesco shares, the dividend will be income in the trustees’ hands and payable to the life tenant or subject to the trustee dividend rate of tax, whatever the terms of the trust instrument effectively require.
It is disappointing that the impact that such schemes can have on trusts is rarely reviewed by companies when considering how they can “return value” to their shareholders.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
We have a few clients with TESCO holdings you can elect to use the DRIP scheme to avoid this problem, they will use the dividend to buy new shares after the consolidation - there by avoiding the dividend paymnet to the life tennent. You needed to contact Equiniti by the 12th I think from memory.
The DRiP scheme is what it says on the tin – a dividend is paid which is reinvested in shares.
Signing up to a DRiP arrangement does not convert the dividend into capital in the hands of a trustee, either for the purposes of identifying beneficial entitlement or for tax purposes.
Where there is an interest in possession the trustee will need to account to the life tenant for the shares received via the DRiP scheme.
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals
This issue raises some interesting questions. Any shareholder on the DRIP reinvestment scheme was entitled to elect to receive cash instead of shares for the Special Divided if Equiniti received the election by yesterday (I am dealing with an estate where there is a Tesco Holding an had to visit Lancing yesterday to hand in the election). My understanding of the situation is that Tesco are in effect returning capital to shareholders and that whilst this is described as a dividend it is in fact a return of capital. If that analysis correct then any special divided would be treated as trust capital and not income. Would be interested to know how other members are treating this special dividend for income tax and CGT purposes.
Michael McCabe
Galloways Accounting Trust Corporation Limited
With regard to the tax treatment of these schemes, the documentation usually sets out clearly how each part is to be taxed, or income or capital.
My view would be that the dividend is income and needs to be paid over to the income beneficiary regardless of the fact that it has been invested. I would pay cash even if something had to be sold to raise the cash.
In any event, I would have thought any trust portfolio should be well diversified and not have any one holding as too great a proportion of the whole, so this somewhat distorting event should not be too significant. That said I did once have a discretionary trust client who was insistent, against stockbroker advice, on retaining a very large historical holding in one company. The broker asked, and the client agreed, for the holding to be moved to a sub-portfolio as they did not want it distorting their performance figures on which they were of course judged. So I know there are some big old distortions out there!
[A] In an income interest possession trust the dividend must be credited to the income account from which the beneficiary has a right to income and be provided with a trust income tax certificate on an arising calculation basis.
Otherwise I consider the trustees are failing in their duties.
[B] Where there is not an income interest in possession the trustees must:
(i) Include it in the dividend rate calculation
(ii) Credit it to the income account from which in due course it has to be paid out at the discretion of the trustees, unless they exercise a valid power to accumulate income and transfer it to the capital account.
I have in my time come across situations where trustees have, incorrectly in my view, invested in accumulation units or entered into a company DRIP arrangement.
In these situations I consider that
[C] In an income interest in possession trust the trust capital account needs to ‘purchase’ the accumulation/DRIP receipt by making an equivalent cash payment to the income account in order to follow the procedure at [A]above.
[D] Where there is not an income interest in possession the trustees must:
(i) Include the accumulation/DRIP receipt in the dividend rate calculation.
(ii) Unless they exercise a valid power to accumulate, have the capital account ‘purchase’ the accumulation/DRIP receipt by transferring an equivalent cash payment to the income account from which in due course it has to be paid out at the discretion of the trustees.
Whilst I agree that Tesco’s return of value arises from the disposal of what would normally be considered a Balance Sheet asset, it is long established in the law of England & Wales that the nature of what a trustee receives is reflective of how it is designated by the company – Bouch v. Sproule (1887) and Hill v. Permanent Trustee of N.S.W. Accordingly, as Tesco has made the payment by way of a “special dividend” it is income in the hands of the trustee (subject to the trust instrument not providing otherwise).
The fact that a trustee might elect for dividends to be automatically reinvested in the paying company, via a Dividend Re-Investment Plan or similar arrangement, that does not convert the dividend into a capital receipt.
Andrew Mortimer has set out the position fairly clearly, although there does not always need to be any adjustment between income and capital. The person entitled to the interest in possession may want to receive the shares arising from the DRiP election. That does not stop the amount of the declare dividend being income though. Whilst infrequent, some life tenants view such arrangements as a cheap way of acquiring shares.
(Demergers are a statutory exception to the above principle, but only if they comply with the criteria set down by s.2 Trusts (Capital and Income) Act 2013.)
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals