Income Tax (Trading and Other Income) Act 2005 section 394

Distribution when dividend shares cease to be subject to SIP

Section 394 deals with the income tax consequences when dividend shares leave a Share Incentive Plan (SIP) within three years of being acquired on the participant's behalf.

• If dividend shares cease to be subject to a SIP within three years of acquisition, a distribution is deemed to have been made to the participant for income tax purposes in the tax year the shares leave the plan.
• The deemed distribution amount is normally the cash dividend originally used to acquire the shares, to the extent it represents a dividend paid on plan shares in a UK resident company.
• Where the plan requires the dividend shares to be offered for sale, the deemed distribution may instead be a proportionate fraction of the shares' market value at the time of sale, if that produces a lower figure.
• The participant is personally liable for any income tax arising on the deemed distribution, and whether the distribution is treated as being from a UK resident company depends on the company's residence status in the year the original dividend was paid.