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Investors Are Set For A Dividend ‘Surge’ Ahead Of George Osborne’s New Dividend Tax!

If history’s anything to go by, George Osborne’s overhaul of the way UK dividends are taxed will inspire a surge of special dividend announcements over the next nine months.

Indeed, on two occasions during past five years, companies both here and in the US have brought forward dividends and issued special payouts ahead of sweeping tax changes. 

Dividend reforms 

Dividend tax changes, which are set to come into force next year, will see the dividend tax credit abolished. It will be replaced with a dividend tax allowance of £5,000 per year. Any dividends above the new £5,000 tax-free limit will be taxed according to the investors’ income tax bracket.

Basic-rate tax payers will pay 7.5% on dividends over the £5,000 limit. Higher-rate tax payers will pay 32.5%, and additional-rate taxpayers will pay 38.06%. 

A similar scenario occurred in the US three years ago. It was believed that the tax on US dividends would be hiked from a steady 15% to around 39.6%, plus a 3.8% surcharge. The exact figure depended on fiscal cliff negotiations, which went down to the wire.

To ensure that shareholders got the best deal and weren’t caught out by a crippling higher tax rate, 120 companies announced special dividends before the tax changes came into force. Some companies, such as Brown-Forman and Costco, actually borrowed billions to try and return as much cash to investors as possible.

Two years earlier, when the 50p top rate of income tax was introduced here in the UK, 73 companies brought forward their dividend payouts and a further 71 declared exceptional or special dividends. 

Plenty of cash to go around 

So, the second half of this year could see a deluge of special dividend announcements and there are some companies that are likely to return more cash than others. 

Specifically, companies with cash balance and a high level of insider ownership have historically been the fastest to announce one-off dividends ahead of tax changes. 

WPPSports Direct and Hargreaves Lansdown are three such candidates. These companies still count their founders as majority shareholders. 

Homebuilder Persimmon is already planning to return £3.80 per share to investors during the next six years. Management has accelerated this payment plan once in the past six months, and budget changes could inspire another revision.

Additionally, retailer Next has a well-established policy of returning surplus cash to shareholders. This year the retailer was planning to return £90m per quarter to investors via special payouts, and there’s scope for this payment plan to be revised if the company has the extra cash on hand. 

Insurers such Lancashire and Admiral also have an established policy of returning surplus cash to shareholders. What’s more, the two insurers’ have a high level of insider ownership. Direct Line could be another special dividend candidate.

Elsewhere, recruiter Hays stated earlier this month that it would consider issuing a special dividend over the next 12 months as trading improves. Once again, budget changes could accelerate management’s dividend plans.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended shares in Sports Direct. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.