The high-street chemist plans to hand back £1.43 billion to shareholders following the sale of its consumer-healthcare arm, Boots Healthcare International (BHI).
But if you are a higher-rate taxpayer the gift comes with a sting in the tail. You will have to pay 25% income tax on the dividend you receive. Basic-rate tax will in effect have been deducted already. A higher-rate payer with 1,000 shares should receive a dividend cheque of £2,000 but will have to hand another £500 to the taxman.
In the past, other companies have avoided this by paying back cash in the form of “B” shares, which are regarded as a return of capital, not income.
Boots decided this was not appropriate because Revenue & Customs refused to guarantee it would work, and it would have been expensive and complex.
But there are ways to escape the charge and still hang on to your Boots shares.
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You can transfer the shares to a husband, wife or civil partner who is on a lower tax rate. Basic and lower-rate taxpayers don’t pay anything extra on dividends. Nor do you have to worry about capital-gains tax (CGT) on the transfer, as spouses and civil partners are exempt.
For it to work you must make the transfer before the ex- dividend date. Boots expects to announce the ex-dividend and special-dividend payment dates this week, when the BHI sale is completed. Some accountants and advisers suggest you sell your shares before they go ex-dividend and buy them back later. Then you will not pay the tax because you will not receive the dividend.
You need to get something back in return to make it worthwhile. Normally, you would expect the shares to fall after the ex-dividend date. You could then buy back the same number of shares more cheaply, bagging a profit.
But the Boots scheme is more complex. As part of the deal it is shrinking its share capital. People who hold the shares when the consolidation takes place will receive 39 new shares for every 58 they now hold.
Boots claims that, all other things being equal, this will mean that the share price will not change when the shares go ex-dividend. But Mike Warburton of Grant Thornton, an accountant, says that selling shares can still be beneficial.
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“The share consolidation is a bit of a red herring,” said Warburton. “If the share price remains the same you will be able to sell 58 shares and buy 58 shares back. But if you do nothing the number of shares you hold will shrink and your investment will be worth less.”
In reality it is not quite that simple, as you need to factor in dealing costs.
You should also watch out for CGT, which is normally payable on profits of £8,500 or over. But if you buy back the same number of shares within 30 days you avoid CGT under the so-called “bed and breakfast” rules.