What is bonus share capital under Corporation Tax Act 2010 section 1051?

Bonus share capital is share capital issued either entirely without new consideration or, where some new consideration was provided, the portion not properly attributable to that new consideration. This typically covers bonus issues or scrip issues where a company capitalises reserves and issues new shares to existing shareholders without requiring full payment.

When is share capital treated as issued in lieu of a cash dividend under section 1051?

Share capital is treated as issued in lieu of a cash dividend when a company offers shareholders a choice between receiving cash or additional shares, often called a scrip dividend arrangement, and the shareholder exercises the option to take shares instead of cash. The stock dividend rules then apply to those shares.

What counts as an option for the purposes of the stock dividend rules in section 1051?

The definition of an option is deliberately broad. It covers cases where a shareholder must actively choose between cash and shares, and also cases where a shareholder is offered one form of payment with a right to elect for the other instead. It does not matter how the right is expressed in the company's documentation.

What happens if a shareholder fails to exercise the right to elect for cash under a scrip dividend scheme?

A shareholder who abandons or fails to exercise a right to switch from the default option is still treated as having exercised an option. For example, if the default is to receive shares and the shareholder takes no action, those shares are treated as issued in lieu of a cash dividend, and the stock dividend rules apply.

Corporation Tax Act 2010 section 1051

"Bonus share capital" and "in lieu of a cash dividend"

Section 1051 provides definitions of "bonus share capital" and explains when share capital is treated as issued "in lieu of a cash dividend" for the purposes of the stock dividend rules.

Bonus share capital is share capital issued without full new consideration, or the portion of issued share capital not properly attributable to new consideration.
Share capital is issued in lieu of a cash dividend when it results from a shareholder exercising an option to receive additional shares instead of a cash dividend.
An "option" exists both where a shareholder must choose between cash or shares, and where a shareholder is offered one but has a right to choose the other instead.
A shareholder who abandons or fails to exercise a right to choose the alternative (for example, letting a default share option stand by not electing for cash) is treated as having exercised an option.

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