Scrip dividends and their CGT base cost

Q: How does this work in practice?

Illustration only. Alan holds 10,000 shares in a listed UK company in a section 104 pool with a cost of £20,000. The company declares a dividend of 6p a share, with a scrip alternative. Alan elects for scrip and receives 150 new shares instead of £600 cash. On the first day of dealing the 150 shares are worth £612. The gap between £600 and £612 is £12, well under 15% of £612, so the cash equivalent is £600. Alan has £600 of dividend income for the tax year. Any unused part of his £500 dividend allowance covers it first, and the rest is taxed at his dividend rate. His pool becomes 10,150 shares with a cost of £20,600. If he later sells 2,030 shares from the pool, the allowable cost is 2,030 / 10,150 of £20,600, which is £4,120. If the company had instead offered shares worth £750 for the £600 dividend, the £150 gap is 20% of £750. The cash equivalent would be £750, so Alan would have £750 of dividend income and add £750 to his pool cost.

A scrip dividend from a UK company, where you take new shares instead of cash, is taxed as dividend income on its cash equivalent. The same cash equivalent becomes the Capital Gains Tax cost of the new shares, which are treated as a fresh acquisition on the issue date and normally join your section 104 pool. This is the opposite of an ordinary bonus issue, where the new shares carry no extra cost.

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What is a scrip dividend?

A scrip dividend, also called a stock dividend, is where a company lets its shareholders take extra shares instead of the usual cash dividend. HMRC’s Savings and Investment Manual at SAIM5150 notes that the shareholder avoids the dealing costs of buying shares and the company keeps its cash.

The tax rules sit in Chapter 5 of Part 4 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). Section 410 applies to share capital issued by a UK resident company in lieu of a cash dividend, and to bonus shares issued on shares whose terms carry a right to bonus share capital. An ordinary bonus issue made by resolution, where reserves are capitalised and shares allotted pro rata, is not a stock dividend; that case is covered in bonus issues and rights issues.

How is a scrip dividend taxed as income?

Section 409 charges income tax on stock dividend income, and section 411 sets the amount as the cash equivalent of the new shares. Under section 412 the cash equivalent is normally the cash dividend you gave up. But if the difference between that cash alternative and the market value of the shares equals or exceeds 15% of the market value, the cash equivalent is the market value instead. Market value is taken on the first day of dealing for listed shares, or on the earliest date the company must issue the shares otherwise.

Stock dividend income is dividend income under section 19 of the Income Tax Act 2007, so it uses the £500 dividend allowance and the dividend rates. For 2026 to 2027 those rates are 10.75% in the basic rate band, 35.75% in the higher rate band and 39.35% in the additional rate band. The income arises on the earliest date the company is required to issue the shares (section 410(6)). See dividend allowance and tax rates.

The charge falls on an individual beneficially entitled to the shares, on trustees where a cash dividend would have been accumulated or discretionary income, and on personal representatives through the estate income rules (sections 410 and 413).

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What is the CGT base cost of the new shares?

Section 142 TCGA 1992 links the two taxes. Where section 410(2), (3) or (4) ITTOIA 2005 applies, the issue is not a reorganisation for sections 126 to 128, and the person receiving the shares is treated as acquiring them for a consideration equal to the cash equivalent under section 412. In practice, the amount you are taxed on as income is the amount you can deduct as cost.

HMRC’s Capital Gains Manual at CG58750 confirms the consequence: the new shares are a new acquisition, not added to the existing holding under the reorganisation rules, and any disposal is matched under the normal identification rules.

How do scrip shares go into the section 104 pool?

Because the scrip shares are an acquisition of shares of the same class on the issue date, they normally join your section 104 holding. You add the number of new shares to the pool and add the cash equivalent to the pool cost.

The exception is the 30 day rule. Under section 106A(5) TCGA 1992, if you dispose of shares and acquire shares of the same class within the following 30 days, the disposal is matched with those later shares first, and they never enter the pool. A scrip issue arriving within 30 days after a sale is such an acquisition, so part of the sale is matched with the scrip shares at their cash equivalent cost. The order of matching is explained in share matching rules.

What happens with an enhanced scrip dividend?

Some companies offer shares worth noticeably more than the cash alternative to encourage shareholders to take scrip. This is where the 15% test in section 412(2) bites. If the shares are worth so much more that the gap is 15% or more of their market value, both your income and your CGT base cost are the market value of the shares, not the cash you gave up. If the gap is smaller, both are the cash alternative.

Does the same treatment apply to every shareholder and every company?

No. Section 410 only covers shares issued by UK resident companies. For a scrip offered by a foreign company, CG51823 says that where a shareholder takes shares instead of cash the effect is similar to a bonus issue for which no consideration is given and should be treated in the same way, so for capital gains the new shares join the original holding with no added cost.

Section 142 only applies where section 410(2), (3) or (4) does, which covers individuals, the trustees described above and personal representatives. Companies receiving stock dividends follow different rules, and CG58750 refers to the Company Taxation Manual at CTM17000 onwards for them.

A dividend reinvestment plan is also different. HMRC’s Stamp Taxes on Shares Manual at STSM078030 describes a DRIP as reinvesting cash dividends in the purchase of additional shares. You receive a normal cash dividend, taxed as such, and the shares are bought with that cash, so their cost is what was paid for them.

How does this work in practice?

Illustration only. Alan holds 10,000 shares in a listed UK company in a section 104 pool with a cost of £20,000. The company declares a dividend of 6p a share, with a scrip alternative. Alan elects for scrip and receives 150 new shares instead of £600 cash. On the first day of dealing the 150 shares are worth £612.

The gap between £600 and £612 is £12, well under 15% of £612, so the cash equivalent is £600.
Alan has £600 of dividend income for the tax year. Any unused part of his £500 dividend allowance covers it first, and the rest is taxed at his dividend rate.
His pool becomes 10,150 shares with a cost of £20,600.
If he later sells 2,030 shares from the pool, the allowable cost is 2,030 / 10,150 of £20,600, which is £4,120.

If the company had instead offered shares worth £750 for the £600 dividend, the £150 gap is 20% of £750. The cash equivalent would be £750, so Alan would have £750 of dividend income and add £750 to his pool cost.

What mistakes come up most often?

Treating UK scrip shares like a bonus issue with no cost, which overstates the gain on sale.
Leaving the scrip dividend off the tax return because no cash was received.
Using the cash alternative when the enhanced scrip test means market value applies.
Adding scrip shares to the pool when they should be matched with a sale made in the previous 30 days.
Confusing a DRIP, which is a cash dividend reinvested, with a scrip dividend.
Not keeping the company’s scrip statements, which record the number of shares and the cash equivalent needed for both taxes.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.