Corporation Tax Act 2010 section 1050

Application of section 1049 where bonus share capital is converted etc.

Section 1050 sets out the tax treatment of shares issued when bonus share capital is converted into, or exchanged for, shares of a different class in the same company.

• When bonus shares (as defined in section 1049) are converted or exchanged for a different class of shares, the resulting "replacement shares" are not covered by the stock dividend rules in section 1049.
• If the original bonus shares were already taxed as stock dividend income under the income tax rules, the replacement shares are not treated as a distribution and are not caught by the anti-avoidance rules on bonus issues following share capital repayments or distributions following bonus issues.
• If the original bonus shares were never subject to the stock dividend income rules (for example, because they were issued before the relevant legislation took effect), the replacement shares lose the protection of section 1049 and will instead be treated as distributions, with no new consideration deemed to have been received.
• The effect of these rules is to prevent the same economic value from being taxed twice — once as a stock dividend and again as a distribution on conversion — while still ensuring that shares which escaped the stock dividend charge are appropriately taxed when converted.