Who is entitled to a tax credit on qualifying distributions from UK resident companies under section 397?

Under section 397 of ITTOIA 2005, two categories of recipient are entitled to a tax credit: persons who are resident in the United Kingdom, and eligible non-UK residents. Eligible non-UK residents include Commonwealth citizens, EEA nationals, and citizens of the Isle of Man and Channel Islands who claim UK personal allowances during the relevant tax year.

How is the value of the tax credit on a qualifying distribution calculated?

The tax credit is equal to one ninth of the amount of the qualifying distribution received. For example, a qualifying dividend of £9,000 attracts a tax credit of £1,000. This credit can be set against the recipient's income tax liability arising on that distribution, reducing the overall tax payable on the dividend income.

What happens to the tax credit if personal allowances reduce the tax on the distribution?

The tax credit is only available to the extent the qualifying distribution is actually brought into charge to income tax. If personal allowances or other deductions reduce or eliminate the tax charge, the credit is reduced proportionally. For instance, if only two thirds of a distribution is taxed, the tax credit is reduced to one ninth of that taxed portion only.

How does section 397 apply when a distribution is received by a nominee or agent?

Where a qualifying distribution is received by a nominee or agent on behalf of another person, entitlement to the tax credit is determined by the residency and status of the underlying beneficial owner, not the person who physically receives the distribution. This ensures the credit follows the true economic recipient of the dividend income.

Income Tax (Trading and Other Income) Act 2005 section 397

Tax credits for qualifying distributions of UK resident companies: UK residents and eligible non-UK residents

Section 397 establishes who is entitled to a tax credit on qualifying distributions made by UK resident companies, and how the value of that tax credit is determined.

A tax credit of one ninth of the qualifying distribution is available to UK residents and certain eligible non-UK residents (such as Commonwealth citizens and EEA nationals entitled to UK personal allowances).
The tax credit can be set against the recipient's income tax liability on the distribution, but only to the extent that the distribution is actually brought into charge to income tax.
If personal allowances or other deductions reduce or eliminate the tax charge on the distribution, the tax credit is correspondingly reduced — potentially to nil.
Where a distribution is received by a nominee or agent on behalf of another person, entitlement to the tax credit is determined by reference to the residency status of the beneficial owner, not the actual recipient.

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