What is the excessive return condition under section 693 of the Income Tax Act 2007?

The excessive return condition tests whether a dividend exceeds a reasonable commercial return on the consideration paid by the recipient for the relevant shares or securities. If the dividend is disproportionately large compared to a normal arm's length investment return, the condition is met and the dividend may be treated as abnormal under anti-avoidance rules.

How does HMRC determine whether a dividend is abnormal under the excessive return condition?

HMRC compares the actual dividend received against what would constitute a reasonable commercial return on the shareholder's original investment. Factors considered include the type of shares, associated risks, and prevailing market conditions. If the dividend significantly exceeds this benchmark, it may be classified as abnormal and challenged under anti-avoidance provisions.

What are the practical implications of the excessive return condition for shareholders?

Where a dividend is disproportionately large relative to the investment made in shares, it could trigger anti-avoidance rules under the transactions in securities provisions. Accountants advising clients must assess whether the dividend exceeds a reasonable commercial return, considering share type, investment risks, and market conditions at the relevant time.

Can you give an example of the excessive return condition being met?

If a shareholder purchases shares for £10,000 and shortly receives a £25,000 dividend, while a reasonable commercial return would be around £500 to £1,000 per year, the excessive return condition would be met. The dividend far exceeds any normal return, so it could be treated as an abnormal dividend under the anti-avoidance provisions.

Income Tax Act 2007 section 693

Abnormal dividends: the excessive return condition

Section 693 defines the "excessive return condition" used to identify abnormal dividends, which are dividends that provide a return significantly above what would be expected from a normal commercial investment.

The excessive return condition is one of the tests used to determine whether a dividend is "abnormal" for the purposes of the tax avoidance provisions.
A dividend meets this condition if its amount exceeds a reasonable commercial return on the consideration provided by the recipient for the relevant shares or securities.
The test compares the dividend received against what would be expected as a normal arm's length return on the investment made.
This provision is derived from the former section 709(4) and (6) of the Income and Corporation Taxes Act 1988 and was amended by Finance Act 2010.

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