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First Nationwide and dividends from share premium

Whether a receipt is capital or income is in the abstract inherently neither ‘good’ nor ‘bad’ for tax purposes; but if the position taken by HMRC in a particular case varies depending on the nature of the relief sought or amount of tax assessed this can create unnecessary uncertainty for taxpayers.

The nature of a distribution as income or capital in the hands of the recipient was well-established prior to First Nationwide. Cases such as Reid’s Trustees [1949] AC 361 and Courtauld v Fleming [1969] 1 WLR 1683 set out the principle that the machinery by which the distribution is effected determines its character for the recipient and that where the machinery is a dividend the receipt will be income –...

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