A company may decide to issue extra shares, free of charge, to existing shareholders in the same proportion as their existing holding. This is known as a bonus issue of shares. It is also sometimes called a \u2018scrip issue\u2019 or \u2018capitalisation issue\u2019, because part of the company\u2019s undistributed reserves or profits are capitalised<\/em> and used to pay up the issue of the shares.<\/p>\n A bonus issue can be in respect of all shareholders or restricted to those holding a certain class of shares.<\/p>\n <\/div>\r\n <\/div>\r\n <\/p>\n There are various reasons why a company may decide to issue bonus shares:<\/p>\n Although the process of issuing ordinary shares is broadly similar to that of a bonus issue of shares, there are some important differences which should be noted.<\/p>\n An ordinary allotment of shares is where a limited company issues new shares following initial company formation. These shares may subsequently be sold or given to existing or new shareholders, to raise additional capital from investors, repay borrowings, fund new projects or reward employees, etc. There are various types of shares which can be created in an ordinary allotment (including ordinary shares or preferential shares, etc).<\/p>\n An ordinary allotment of shares is distinct from a bonus issue; whilst shares created by an ordinary allotment can be either sold or given away to both existing shareholders or new shareholders, shares created by a bonus issue can only be distributed to existing shareholders and must be done free of charge. However, as with an ordinary allotment, the types of shares created under a bonus issue can be different. e.g., ordinary, preferential, etc.<\/p>\n A bonus issue and a rights issue of shares are sometimes confused with each other, so it\u2019s important to make the distinction.<\/p>\n A rights issue is an issue of new shares by a limited company, which are subsequently offered for purchase by existing shareholders in proportion to their current holdings. This offer is generally for a stipulated period of time and at a reduced cost, i.e., to what the shares would otherwise be worth.<\/p>\n A rights issue increases the subscribed share capital of a company and raises new capital. However, since the total number of shares is increased, this tends to have a dilution effect on the value of the shares.<\/p>\n Bonus issues of shares stem from accumulated profits and reserves. In effect, excess profits are converted into shares and are distributed to existing shareholders free of charge. This is markedly different from rights issues, where new shares are created (irrespective of profits or reserves) and offered to existing shareholders at a cost.<\/p>\n Other differences include:<\/p>\n A scrip dividend is essentially the same as a scrip issue (which is simply another name for a bonus issue). However, this term it is normally used in relation to public companies.<\/p>\n Public companies often provide shareholders with an option of either receiving a cash dividend or increasing their shareholding by taking a scrip dividend. A scrip dividend essentially converts retained profits into new shares and distributes these shares to shareholders, in proportion to their existing holdings, in lieu of a cash dividend payment.<\/p>\n It\u2019s important not to confuse the term \u201cbonus shares\u201d (connected to a bonus issue of shares) with employee bonus packages which may involve being given a number of company shares in lieu of (or in addition to) a cash bonus.<\/p>\n There are no tax advantages associated with scrip dividends compared to cash dividends; they are both treated as taxable income in exactly the same way. The cash value of shares received as part of a bonus issue needs to be declared and taxed under the dividend taxation rules.<\/p>\n Tax must be paid in respect of any dividend payments above the dividend allowance (currently \u00a3500). The tax paid in respect of dividends above this allowance depends on the income tax band: 8.75% for the basic rate, 33.75% for the higher rate, and 39.35% for the additional rate. GOV.UK provides official guidance on tax on dividends<\/a>.<\/p>\n If shares received as part of a bonus issue are subsequently sold, Capital Gains Tax may be due. For information on Capital Gains issues in relation to bonus issues, see GOV.UK – capital gains manual<\/a>.<\/p>\n Private companies have recently joined listed companies in being able to not only buy back shares but also hold these shares in \u2018treasury\u2019. Treasury shares can be held by a company (instead of cancelling them) – during which time there is no change to the amount of the company’s share capital and no amount is transferred to the capital redemption reserve, and sold on or transferred at a later date.<\/p>\n While shares are held in treasury, any associated voting rights are suspended, and they are treated as if they had been cancelled for most tax purposes.<\/p>\n If a company has treasury shares and then undertakes a bonus issue of shares, it can decide whether or not to issue bonus shares in respect of the treasury shares, as well as to the other relevant shareholders. If it chooses to issue bonus shares in respect of treasury shares, these bonus shares are then also held in treasury and are similarly devoid of voting rights while they are held in treasury.<\/p>\n For most tax purposes, these bonus shares held in treasury are treated as though they had never been issued.<\/p>\n \u201cSubject to the articles, the directors may, if they are so authorised by an ordinary resolution –\u00a0<\/em><\/p>\n (a) decide to capitalise any profits of the company (whether or not they are available for distribution) which are not required for paying a preferential dividend, or any sum standing to the credit of the company\u2019s share premium account or capital redemption reserve; and<\/em><\/p>\n (b) appropriate any sum which they so decide to capitalise (a \u201ccapitalised sum\u201d) to the persons who would have been entitled to it if it were distributed by way of dividend (the \u201cpersons entitled\u201d) and in the same proportions.<\/em>\u201d<\/p>\n Our Company Secretarial Team offers a complete Bonus Issue of Shares Service from just \u00a395.00 +VAT.<\/p>\n We’ll guide you through the entire process, providing you with all the supporting documentation you need to make a bonus issue happen, including your board minutes, members resolution, and Companies House forms. Call our experts today on 020 3984 5389 or email us on cosec@qualityformations.co.uk to find out more.<\/p>\n Note: We recommend seeking independent legal and\/or accounting advice when undertaking a bonus issue of shares – as there may be various unforeseen tax or legal implications for your business.<\/p>\n \r\n
Key takeaways<\/h2>\r\n
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Examples of a bonus issue:<\/h2>\n
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What are the reasons for undertaking a bonus issue of shares<\/h2>\n
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What is the difference between a bonus issue and an ordinary allotment?<\/h2>\n
What is an ordinary allotment of shares?<\/h3>\n
How is an ordinary allotment different from a bonus issue of shares?<\/h3>\n
What is the difference between a bonus issue and rights issue?<\/h2>\n
What is a rights issue?<\/h3>\n
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\r\n <\/a>\r\n <\/div>\r\n <\/p>\nHow is a rights issue different from a bonus issue?<\/h3>\n
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What is a scrip dividend?<\/h2>\n
Bonus packages<\/h2>\n
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\r\n <\/a>\r\n <\/div>\r\n \nTax issues<\/h2>\n
Treasury shares<\/h2>\n
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\r\n <\/a>\r\n <\/div>\r\n \nWhat is the procedure for a bonus issue of shares?<\/h2>\n
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Need assistance with a Bonus Issue?<\/h2>\n
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