Bonus stripping: the bonus-share version of a tax practice
Bonus stripping is the bonus-share cousin of dividend stripping, built around the price change after a bonus. This guide explains what bonus stripping is and how rules now curb it.
Quick answer
Bonus stripping is a practice built around bonus shares, where an investor buys before a bonus and sells the original shares after, using the price adjustment to book a loss for tax while holding the bonus shares. Tax rules now limit bonus stripping, so it is understood mainly as a concept rather than a usable strategy.
Key takeaways
- Bonus stripping is built around bonus shares.
- It used the price adjustment after a bonus.
- It aimed to book a loss for tax.
- Tax rules now curb the practice.
- It is best understood as a concept.
What is bonus stripping?
Bonus stripping is a practice built around bonus shares. After a bonus issue, the price per share adjusts down because the share count rises. Bonus stripping tried to use this adjustment for a tax benefit.
The investor would buy shares before the bonus, receive the bonus shares, then sell the original shares at the lower post-bonus price, booking a loss while still holding the bonus shares.
How was it meant to work?
After a bonus, the original shares are worth less each, so selling them creates a loss on paper. The investor kept the free bonus shares, which had little cost attached.
The aim was to use the loss on the original shares to reduce tax on other gains, while retaining value in the bonus shares. This is the same idea as dividend stripping, applied to bonuses.
Why do the rules curb it?
Tax authorities saw bonus stripping as creating artificial losses for tax without real economic loss, since the investor still held the bonus shares. So specific rules were introduced to limit it.
| Element | Reality |
|---|---|
| Original shares sold | Paper loss booked |
| Bonus shares kept | Value retained |
| Tax loss | Limited by anti-stripping rules |
These anti-stripping rules restrict the loss in defined situations, removing much of the tax advantage the practice depended on.
What is the position now?
Because of these rules, bonus stripping is largely curbed as a tax strategy. It survives mainly as a concept that explains why such anti-avoidance rules were needed.
Tax laws can change and depend on individual circumstances. This is as per the rules at the time of writing, so please check the current position before you invest.
What should investors know?
For investors, bonus stripping is another example that gaming the system for tax rarely lasts, since rules adapt. It is a concept to understand, not a strategy to follow.
Understanding bonus stripping helps you see how anti-avoidance rules work. Any investment decision should be your own after proper research, and consult a qualified tax advisor.
Frequently Asked Questions
What is bonus stripping?
Bonus stripping is a practice built around bonus shares, where an investor buys before a bonus and sells the original shares after, using the price adjustment to book a loss for tax while keeping the bonus shares.
How was bonus stripping meant to work?
After a bonus the original shares are worth less each, so selling them creates a paper loss, which the investor aimed to use against other gains while retaining the free bonus shares.
Why do the rules curb bonus stripping?
Tax authorities saw it as creating artificial losses without real economic loss, since the investor still held the bonus shares, so anti-stripping rules were introduced to limit it.
Is bonus stripping still possible?
It is largely curbed as a tax strategy by anti-stripping rules, so it survives mainly as a concept, and tax laws can change based on individual circumstances.
Should I try bonus stripping?
No. It is a concept to understand, not a strategy to follow, since rules adapt to such practices, and you should consult a qualified tax advisor before any decision.
Disclaimer: Investments in the securities market are subject to market risks. Please read all related documents carefully before investing. This article is intended for informational and knowledge purposes only and should not be considered tax, financial, or investment advice. Tax laws and deductions may vary based on individual circumstances and regulatory changes. Readers are advised to consult a qualified tax advisor or financial professional before making any investment or tax planning decisions.
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