US tax implications of Vodafone payout – Sipps offer shelter but Isas do not says Hargreaves Lansdown

3rd September 2013

img

Broker Hargreaves Lansdown has set out in detail what the Vodafone Verizon deal means for investors and the possible tax implications.

Some £54 billion is to be returned to Vodafone shareholders through a mixture of a special dividend and a holding in Verizon shares. This £54 billion has been estimated to equate to 112p per share with the current share price of Vodafone is 208.3p. This breaks down into 32p as a special dividend plus 80p in Verizon shares.

Hargreaves has provided the following worked example of how the deal breaks down.

A holder of 1000 shares in Vodafone currently carries a value of £2083. As a result of the announcement this equates to

–          1000 shares in the “new” Vodafone (208.3p – 112p = 96.3p) = £963

–          Special dividend at 32p per share = £320

–          26 shares  in Verizon (based on Verizon’s latest price of $47.34 and assuming an exchange rate of 1.55 = £30.54 per share) = £800 (rounded up)

–          Total = £963 + £320 + £800 = £2083

Put another way, an investor with a £5000 investment in Vodafone

–          Has 2400 shares (5000/208.3p)

–          Equates to 2400 shares in the “new” Vodafone at 96.3p = £2311

–          Special dividend at 32p per share = £768

–          62 shares in Verizon at £30.54 per share = £1920 (rounded up)

–          Total = £2311 + £768 + £1920 = £4999

The deal is expected to be completed in the first quarter of 2014, preceded by a shareholder circular to be sent in December 2013.

Hargreaves says the structure of the deal presents Vodafone shareholders with a number of options. It outlines them below.

For example, if the investor does not wish to continue with the current holding following the announcement, it is simply a case of selling Vodafone shares in the normal way.

For those wishing to continue, there are two immediate questions – what to do with the special dividend proceeds and also with the newly “acquired” Verizon stake.

The Special dividend explained

The choices are to take the special dividend in cash which will be subject to tax if held outside an ISA or SIPP, perhaps to pay down personal debt, invest the monies elsewhere, etc.

Alternatively the dividend could be reinvested into Vodafone shares or indeed Verizon if the investor prefers the prospects for that company.

In addition, Hargreaves explains that at Vodafone’s request, Verizon has agreed to provide Vodafone shareholders holding fewer than 50,000 Vodafone shares with the means of realising the value of their Verizon shares at completion in a “straightforward and cost-effective manner” through a dealing facility. Verizon will make arrangements to provide shareholders with CREST Depositary Interest (CDIs) and related facilities to allow settlement of trading in Verizon shares through CREST.

 The US tax issue

US sourced income such as interest paid by US companies or any dividends from Verizon shares will be taxed at source at 30%.

However if investors hold their shares through a Qualified Intermediary (QI) a reduced rate of tax will apply, 15% for dividends or 0% if paid into a SIPP).

Hargreaves Lansdown Stockbrokers is a QI enabling HL to receive and pay US sourced income – dividends or interest paid by US companies at the reduced rate to eligible shareholders.

The table below shows the withholding tax rates applied to US income depending on the eligibility of the client and if the income is paid into a SIPP.

·         US Income

Client types Withholding Tax on dividends Withholding Tax on interest (e.g. corporate bonds) Withholding Tax on corporate event proceeds (e.g. takeover)
Non eligible shareholders

30%

30%

30%

Eligible shareholders

15%

0%

0%

Eligible shareholders in SIPP

0%

0%

0%

Eligibility

Non-US shareholders can get reduced rates of tax on US derived income by completing an IRS W-8BEN document. A W-8BEN is valid for 3 years at which point a new form is required.

 Why is the tax treatment of US dividends in a SIPP different to the ISA?   

The Double Taxation Agreement (DTA) between the US and UK provides specific exemption for approved pension schemes but does not recognise ISAs in the same way. ISA’s receive the same treatment as share accounts.

For investment into Vodafone, the current market consensus is that the shares are a buy

Things are warming up in the telecoms sector, with Europe becoming a particular focus as underlined by Microsoft’s acquisition of Nokia.

Vodafone, of course, is already well established in this space and the disposal of the Verizon stake should result in further focus on two fronts. There are pockets of the European operation which are struggling due mainly to economic constraints and fierce competition. However, the Kabel Deutschland acquisition is a clear statement of intent. Elsewhere, Vodafone has certainly not ruled out selective acquisitions in the emerging markets, which currently account for some 30% of its business and where the demographics are arguably developing in its favour.

The announcement has been well received and prospects for Vodafone remain promising. The share price has seen a 17% hike over the last year, as compared to a 13% hike for the wider FTSE100, and the current yield of 4.7% is supportive at least until the New Year when the deal completes.

There are concerns that Vodafone will now be lacking the cash Verizon had previously provided, not to mention its lack of exposure to the US market. The company has decided, however, that now is the right time to take profits on its Verizon venture in order largely to concentrate on mobile and unified communication services in both mature and emerging markets. The main thrust of this strategy is to be achieved through “Project Spring”, fuller details of which will be provided in due course, but which will involve “additional organic investments in 4G, 3G, fibre and broadband, enterprise services and improved customer experience across all of our markets.”

The dividend is also subject to an interesting development. Vodafone has announced an 8% increase in the dividend for the full 2014 financial year (to 11p) and to grow it thereafter. In addition, the company intends to consolidate the “new” shares in order to “seek to maintain broad comparability” of its share price following the disposal. As such, in theory the dividend yield could continue to be similar to the one currently seen.

Leave a Reply

Your email address will not be published. Required fields are marked *