Income Tax (Trading and Other Income) Act 2005 section 396A

Arrangements offering a choice of capital or income return

Section 396A deals with situations where a shareholder is offered a choice between receiving a company distribution (such as a dividend) and receiving something else of equivalent value that would not normally be subject to income tax, and ensures that the alternative is taxed as if it were a distribution.

• Where a person can choose between a company distribution and an alternative of substantially the same value that would otherwise escape income tax, choosing the alternative causes it to be treated as a distribution for income tax purposes in the year of receipt.
• The alternative receipt is also treated as a qualifying distribution for the purposes of company reporting obligations under sections 1100 to 1103 of the Corporation Tax Act 2010.
• The rule applies regardless of any conditions attached to the choice, and failing to exercise a right — for example, not electing to receive one class of bonus share and therefore receiving another by default — counts as making a choice.
• Where the income tax charge on the alternative receipt creates a double charge alongside another tax (such as capital gains tax on a later disposal), the taxpayer can claim just and reasonable adjustments to relieve that double charge, with no time limit restriction.

---