What does a foreign takeover mean for a UK shareholder?

Shareholders in Alliance & Leicester are having to vote on a £1.3bn takeover deal, which will involve them giving up three of their existing shares for one in predator Banco Santander. That means subsequently receiving dividends on foreign-listed, rather than UK-listed, shares. So what are the tax implications?

As Mike Warburton says in the FT, there's good news for higher-rate taxpayers. Foreign dividends now qualify for a "notional 10% tax credit", similar to that attached to British dividends. Say you are due to receive a £90 dividend on your Spanish shares. Spanish tax rules require local firms to "withhold" 18% as local tax. That reduces the cash you receive to £73.80 (0.82 x £90).

But under UK rules, your tax liability on the same dividend would be 32.5% of an assumed "gross" dividend of £100 (firms are deemed to have deducted a 10% tax credit here £10 before declaring a net dividend, in this case £90). But, under the "double taxation relief" rules you only suffer the higher of either the Spanish (£16.20) or the UK tax (£32.50) on a dividend, so you don't pay twice.

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With the notional £10 tax credit on the Spanish dividend, the extra UK tax payment is just £6.30 (£32.50 of UK tax £10 tax credit tax already paid in Spain of £16.20). The total tax paid of £22.50 (£16.20 + £6.30) leaves a net dividend of £67.50 (£90 - £22.50). Had the dividend of £90 been received from a UK firm, you'd also pocket a net £67.50, and expect to pay UK tax of £22.50 (22.5% x £100 gross dividend).

The situation is less fair for basic-rate taxpayers. They suffer the higher of the 18% Spanish tax or the UK 10% basic rate, in this case 18%. They then reclaim a UK tax credit of 10%, so get an extra 8% bill compared with receiving a UK dividend. This can be reclaimed in Spain, but is a hassle on a small shareholding. As for using an Isa, Warburton points out that if you have to choose between sheltering UK or overseas assets, opt for Britain, as overseas withholding tax is not recoverable.