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Scrip Dividends

UK Scrip Dividends
A Scrip Dividend involves companies offering shareholders a new issue of shares instead of dividends; similar to a (mini) rights issue. Scrip dividends were popular up until the abolishment of the Advance Corporation Tax (ACT) in April 1999. Most companies have replaced scrip dividends with with DRIPS - Dividend ReInvestment Plans, whereby the dividend is used to buy shares in the market. Stamp duty and in some cases brokerage commissions are payable, making DRIPS less attractive to investor than Scrip dividends.

A small number of companies still offer shareholders shares instead or dividends, which in effect is a mini rights issue. A Scrip dividend involves:

Shares being allocated on the basis of the market price on a given date, e.g. if an investor is entitled to a net dividend of £50 and the share price is 100 pence, the investor will be offered 50 shares (£50 dividend payment divided by a share price of 100 pence).

The advantage to the shareholder is that they can acquire more shares in the company without having to pay brokerage expenses or stamp duty.

The advantage to the company is that cash is retained within the business.

Managing Scrip Dividends using timetotrade
A Scrip Dividend is treated as a normal dividend followed by the purchase of shares equal to the dividend amount. There is a 'notional' Income tax liability associated with receiving a Scrip Dividend, even if you receive shares rather than a dividend cash payment.

If you have received a Scrip Dividend, firstly enter the dividend value as per normal in the Investment section of the Ledgers, then enter the number of share purchased on the scrip dividend date in the Share Transaction field. The total cost of the shares purchased should equal the scrip dividend value.

JJB plc Scrip Dividend Example
Your Board recognises that any reduction in the dividend payable may be unpalatable to Shareholders. Reported profits of the Group in the 52 weeks to 29 January 2006 are however significantly below other recent years, for the reasons set out in the Annual report and Financial statements which accompany this document.

Subject to the passing of Resolutions and to such admission, holders of Ordinary Shares who so elect, will receive one New JJB Share for every 24.892857 Ordinary Shares then held by them, instead of the cash dividend on those Ordinary Shares. Elections may only be made in respect of a multiple of 25 Ordinary Shares. No Shareholder shall receive a fraction of a New JJB Share and any residual cash entitlement will be carried forward to the next dividend to minimise the administrative cost to the Company of sending out a large number of cheques for relatively small amounts. This entitlement under the Scrip Dividend Offer has been calculated on the basis of the average of the middle market quotations for Ordinary Shares derived from the London Stock Exchange Daily Official List for the five dealing days commencing on the Ex-Dividend Date. The price for each new Ordinary Share calculated on this basis is 174.25 pence.

The Scrip Dividend Offer gives holders of Ordinary Shares the opportunity to increase their shareholding in the Company without paying any dealing costs or stamp duty.

The tax effect for a Shareholder making an election to receive New JJB Shares under the Scrip Dividend Offer instead of a cash dividend, will depend upon the personal circumstances of that Shareholder. Set out below is a summary of the likely tax consequences for United Kingdom resident holders of Ordinary Shares of making an election under current United Kingdom legislation. This summary is based on law and practice in relation to the tax year 2006-2007.

This summary of the likely taxation treatment is not exhaustive and does not consider the position of any Shareholder not resident in the United Kingdom for tax purposes or special classes of Shareholders such as employees or office holders. If you are in any doubt as to your position, you are strongly advised to consult your professional adviser before taking any action.

UK Resident Individuals: To the extent individual Shareholders elect to take New JJB Shares under the Scrip Dividend Offer instead of a cash dividend, they will be treated as having received gross income of an amount which, when reduced by income tax at the rate of 10 per cent, is equal to the cash dividend (the “cash equivalent”) which would have been received had they not elected to take up New JJB Shares. For example, if an individual receives New JJB Shares under the Scrip Dividend Offer worth £90 instead of a cash dividend of £90, he will be treated as receiving gross income of £100 and as having paid income tax of £10.

Individuals, who after taking into account their receipt of New JJB Shares, pay income tax at a rate no higher than the basic rate, will have no further liability to tax in respect of the receipt of New JJB Shares under elections made pursuant to the Scrip Dividend Offer. Individuals, whose total income for tax purposes (after taking into account the gross amount of income which they are treated as having received as mentioned above) exceeds the threshold for the higher rate of income tax, will be liable to tax at the dividend upper rate (32.5 per cent in 2006-2007) on the gross income which they are treated as having received as described above, to the extent that such income exceeds the threshold for higher rate income tax. Thus, in the above example, the individual will be liable to tax of £32.50 (ie £100 at 32.5 per cent) less £10 tax treated as having been paid, leaving him with a net tax liability of £22.50 still to pay. For this purpose, dividend income is treated as the top slice of an individual’s income.

For capital gains tax purposes, if an election to receive New JJB Shares under the Scrip Dividend Offer instead of a cash dividend is made, the New JJB Shares will be treated as having been acquired for a consideration equal to the cash equivalent.

RBS Scrip Dividend Example

1. Terms of the Election
Ordinary shareholders on the register at the close of business on 11 March 2005 may elect to receive new fully paid ordinary shares of 25p each instead of receiving in cash the final dividend of 41.2p per ordinary share (‘‘the full cash dividend’’). The election may be made by shareholders in respect of the whole or any part of their shareholdings. No fraction of a new share will be allotted. If you elect to take all of your dividend as new shares any residual cash balance arising representing a fractional entitlement will be carried forward in Sterling to the next dividend. If you choose to take only part of your dividend as new shares you will receive the balance in cash. You may elect to receive your dividend in either Sterling or US Dollars. Since the basis of allotment will be equivalent to one new share for every £17.136 of dividend entitlement, shareholders whose dividend entitlement plus any residual cash balance brought forward from a previous Scrip Dividend offer is less than £17.136 will be unable to make an election and will receive the full cash dividend in respect of their shareholdings.

2. Basis of Allotment and Examples
The entitlement to new shares is based on:

(a) A price for each new share of £17.136. This, (‘‘the share price’’) is the average of the middle market quotations for the company’s ordinary shares as derived from the London Stock Exchange Daily Official List for the five business days commencing 9 March 2005 (the day on which the ordinary shares were first quoted ex dividend);

(b) The full cash dividend of 41.2p per share;

(c) The number of shares held by you at 11 March 2005, (‘‘the record date’’); and

(d) The residual cash balance brought forward in Sterling (if any).

The formula used for the calculation is as follows:

(Number of shares held at the record date x full cash dividend per share)
+ residual cash balance in sterling, brought forward (if any)
= Maximum dividend available for share election.

Maximum Dividend Available / Share Price = Number of new shares
(rounded down to the nearest whole number)

You may elect to receive new shares in respect of all or part of your holding of ordinary shares. No fraction of a new share will be allotted.

If you choose to take all of your dividend as new shares a residual cash balance may arise, representing the entitlement to a fraction of a share arising out of the difference between the value of the new shares and the full cash dividend on the shareholding. This residual cash balance will be carried forward in Sterling (without interest) to the next dividend. If you choose to take only part of your dividend as new shares, you will receive the balance in cash.

PART III: TAXATION
The precise tax consequences for a shareholder electing to receive new shares in lieu of a cash dividend will depend on that shareholder’s individual circumstances. The directors have been advised that, under current UK legislation and HMRC practice at the date of this document, the tax consequences for United Kingdom resident shareholders who hold their shares as an investment electing to receive new shares in lieu of a cash dividend will, broadly, be as follows:

1. UK Resident Individuals
Individual shareholders who elect to take new shares in lieu of a cash dividend will be treated as having received gross income of an amount which, when reduced by income tax at the starting rate (currently 10%), is equal to the cash dividend which they would have received had they not elected to take up new shares. For example, if an individual takes new shares in lieu of a cash dividend of £90, he or she will be treated as receiving gross income of £100 and as having paid income tax of £10 on that grossed up amount.
Individuals subject to income tax at the starting rate or basic rate only will have no further liability to tax on receipt of the new shares.

Individuals subject to income tax at the higher rate will be liable to tax at a rate of 32.5% on the grossed up income amount and will be treated as having paid income tax of 10% of the grossed up amount. For example, if a higher rate taxpayer receives a dividend of £90, the tax due will be £32.50. (That is, the total of the dividend of £90 and the tax credit of £10, charged at the rate of 32.5%). The 10% tax credit of £10 can then be set against the tax due of £32.50, leaving the higher rate taxpayer with only £22.50 to pay. This is the same as the additional tax he or she would be liable to pay if he or she received the dividend in cash.

Individual shareholders will not be entitled to claim a repayment of the 10% tax credit attached to any dividend (including cash dividends) paid by the company. The exception in respect of shares held in an Individual Savings Account (ISA) or a Personal Equity Plan (PEP) was withdrawn from 6 April 2004.

Under section 251(2) of the Income and Corporation Taxes Act 1988, the market value (which means the price which the shares might reasonably be expected to fetch on a sale in the open market) of the new shares on the first date of dealing on the London Stock Exchange will be substituted as the deemed dividend if that market value differs substantially from the amount of the cash dividend foregone. It is understood that the HMRC’s current practice is to interpret ‘‘substantially’’ as representing an increase or decrease of 15% or more in value. Should the market value of the new shares be substantially different from the amount of cash dividend foregone, you will be advised of the adjustment in due course.

The receipt of a dividend in the form of shares differs from a cash dividend in that liability to higher rate income tax in respect of a dividend in the form of shares cannot be reduced by an individual’s charges on income. This point should be considered carefully by individuals who make donations to charity or other payments net of basic rate income tax where, in order fully to cover such charges on income for taxation purposes, they may have to rely on dividend income.

If an election to take new shares in lieu of a cash dividend is made, then the amount of the cash dividend foregone, or, if substantially different, the market value of the new shares (the ‘‘cash equivalent’’), will be treated as consideration given for the new shares for capital gains tax purposes. For UK capital gains tax purposes, new shares received by an individual who chooses to receive new shares instead of the cash dividend will be treated as a separate holding acquired for the cash equivalent.

5. Cash Element

If a UK shareholder receives dividends in the form of cash, the cash dividend will be treated as a conventional dividend for UK taxation purposes.

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