Non-qualifying distributions

By Tolley

The following Personal Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Non-qualifying distributions
  • What are non-qualifying distributions?
  • Two danger areas
  • Amount assessable if there is a non-qualifying distribution
  • Taxation of non-qualifying distributions
  • Subsequent qualifying distribution
  • Interaction with capital gains tax
  • Interaction with the temporary non-residence rules

Historically, non-qualifying distributions were distributions that did not qualify for a dividend tax credit. This was usually because they could be structured to be paid out of capital rather than out of profits.

Non-qualifying distributions have always been relatively rare in practice, as the legislation operates as low-level anti-avoidance to deter this type of distribution. If the taxpayer has received a non-qualifying distribution, it should have been identified as such on the dividend voucher received from the company.

Although the dividend tax credit was abolished with effect from 6 April 2016, and the term ‘non-qualifying distributions’ was repealed, this is still a helpful conceptual term to use when thinking about certain distributions that:

  • fall to be treated as dividend income rather than as capital, and
  • require income tax relief where they are later linked to a ‘qualifying’ distribution

Therefore, the guidance below still uses the term ‘non-qualifying distributions’ as a catch-all term for these types of distributions. However, the post-April 2016 legislation refers to these types of distributions as ‘CD distributions’, meaning that these are distributions which fall with categories C or D of CTA 2010, s 1000. Therefore, a ‘qualifying distribution’ is known as a ‘non-CD distribution’ under the post-April 2016 rules.

ITTOIA 2005, s 401; SAIM5050
What are non-qualifying distributions?

The best way of understanding non-qualifying distributions (also known as CD distributions) is to look at some examples of transactions that are treated as distributions for tax purposes, but that were not historically eligible for a dividend tax credit.

Redeemable bonus shares

Normally, a payment to shareholders of bonus shares is not a distribution because all that has happened is that the company has given all its shareholders additional shares, so that

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