Tax-saving dividend offer from Shell

Investors in Royal Dutch Shell, the widely held income stock, are being offered the choice of receiving dividends in the form of “scrip” - additional shares - which could give them significant tax savings compared with taking cash payouts.

The proposed distributions will not be subject to income tax and only liable to capital gains tax (CGT) if the shares are then sold.

Brokers say the new scrip dividend programme, which is available from the third-quarter payout due in December, looks most attractive to higher-rate or 50 per cent taxpayers who do not hold their shares through an individual savings account (Isa) or other tax shelter.

Higher-rate investors could be about 30 per cent better off taking their dividend in scrip rather than taxable cash, while a top-rate taxpayer could be about 50 per cent better off, according to Shell’s figures.

Nick Raynor, investment adviser at the Share Centre said: “The more tax you are subject to, the more attractive the scrip looks.”

Shell says the scheme, which replaces its Dividend Reinvestment Plan (Drip) - where distributions are subject to income tax - could also appeal to investors wanting to build up their stake in the company without incurring buying costs.

However, brokers warn that the scrip dividends will only be issued as “A” shares, rather than the more commonly held “B” stock, meaning that investors would then hold two classes of share in the Anglo-Dutch oil company which would incur separate dealing commissions to sell.

Raynor points out that investors who opt for the scrip would own a relatively small holding in the “A” shares, which could be disproportionately expensive to sell.

Kristian Overend, partner at Killik & Co, adds that investors generally hold Shell for its dividend income, where the yield is currently nearly 6 per cent. “Most want the cash,” he says.

The scrip itself will also not be subject to Dutch withholding tax of 15 per cent that is normally deducted from dividends from the “A”, but not the “B”, shares as a result of the company’s Dutch tax residency. However, to avoid future dividend payouts on the scrip being subject to withholding tax, investors would also need to opt for those distributions to be in stock, says Shell.

Shareholders have until November 26 to sign up for the scrip programme in time for the December distribution; otherwise they will continue to receive cash.

Investors whose shares are held through brokers or wealth managers may have earlier deadlines, and some firms may not offer the stock option.