HMRC Wins Dividend Tax Case

When a trust receives a dividend, the trustees may, in certain circumstances, be able to treat it as a capital receipt rather than a receipt of income. This may have tax benefits for the trust.

The treatment is available when the payment of the dividend reduces the underlying investment value of the shares giving rise to it. However, HM Revenue and Customs (HMRC) will normally take a great deal of convincing that the treatment is appropriate if it also results in tax savings.

In a recent case, a trust received a special dividend of £240,000 and treated it as a capital receipt. HMRC contested the treatment and were successful both in the first instance and on appeal. However, a claim by the taxpayer with regard to the same treatment in respect of a related trust was allowed – in this latter instance, however, there was no tax benefit in the treatment of the dividend as capital.

HMRC will often contest any transactions with unusual treatments if the result is a loss of tax.