How to transform dividends into capital gains?
"Some investment trusts have ""zero dividend preference shares"" which deliver all their gains as capital gains rather than income, even if the trust was investing in income yielding stocks. They've rather gone out of fashion after a scandal some years ago (~2000).  Good 2014 article on them here includes the quote  ""Because profits from zero dividend preference shares are taxed as   capital gains, they can be used tax efficiently if you are smart about   how you use your annual capital gains tax allowance.""" In the US, dividends have special tax treatment similar to, but not the same as Capital Gains. No easy way to transform one to the other, the very fact that you invested your money in a company that has returned part of your capital as income means it is just that, income. Also in the US, you could invest in Master Limited Partnerships. These are companies that make distributions that are treated as a return of capital, instead of dividends. Throughout the life of the investment you receive tax forms that assign part of the operating expense/loss of the company to you as a tax payer. Then at the end of the investment life you are required to recapture those losses as Capital Gains on sale of the stock. In some ways, these investments do exactly what you are asking about. They transform periodic income into later capital gains, basically deferring tax on the income until the sale of the security. Here is an article I found about MLPs coming to the UK through an ETF: Master Limited Partnerships in the UK
Here's how the CBO says the top 1% got their income in 2013 (latest data):      Source|% from source :--------|---------: Cash Wages and Salaries|33.4% Business Income|23.2% Capital Gains|19.1% Capital Income|11.2% Corporate Tax Borne by Capital|7.3% Other Income|3.2% Employer's Share of Payroll Taxes|0.9% Employee's Contributions to Deferred Compensation Plans|0.7% Employer's Contributions to Health Insurance|0.5%   And here are there definitions of the types of income:  * Labor income—Cash wages and salaries, including those allocated by employees to 401(k) plans; employer-paid health insurance premiums; the employer’s share of Social Security, Medicare, and federal unemployment insurance payroll taxes; and the share of corporate income taxes borne by workers.  * Business income—Net income from businesses and farms operated solely by their owners, partnership income, and income from S corporations.   * Capital gains—Profits realized from the sale of assets. Increases in the value of assets that have not been realized through sales are not included in the Congressional Budget Office’s measure of market income.   * Capital income (excluding capital gains)—Taxable and tax-exempt interest, dividends paid by corporations (but not dividends from S corporations, which are considered part of business income), positive rental income, and the share of corporate income taxes borne by owners of capital.   * Other income—Income received in retirement for past services and other sources of income. I wrote about this in another answer: You can sell the scrip dividend in the market; the capital gain from this sale may fall below the annual tax-free allowance for capital gains, in which case you don't pay any capital gains tax on that amount. For a cash dividend, however, there isn't a minimum taxable amount, so you would owe dividend tax on the entire dividend (and may therefore pay more taxes on a cash dividend). Since you haven't sold the shares in the market yet, you haven't earned any income on the shares. You don't owe taxes on the scrip until you sell the shares and earn capital gains on them. HMRC is very explicit about this, in CG33800: It is quite common for a company, particularly a quoted company, to offer its shareholders the option of receiving additional shares instead of a cash dividend. The expression `stock or scrip dividend' is used to describe shares issued in such circumstances. The basic position under tax law is that when a company makes a bonus issue of shares no distribution arises, and the bonus issue of shares is not income for tax purposes in the hands of the recipient. Obviously, if this is an issue for you, talk to a tax professional to make sure you get it right. Am I correct in understanding that a Scrip Dividend involves the issue of new shares instead of the purchase of existing shares? Yes. Instead of paying a cash dividend to shareholders, the company grants existing shareholders new shares at a previously determined price. This allows shareholders who join the program to obtain new shares without incurring transaction costs that would normally occur if they purchased these shares in the market. Does this mean that if I don't join this program, my existing shares will be diluted every time a Scrip Dividend is paid? Yes, because the number of shares has increased, so the relative percentage of shares in the company you hold will decrease if you opt-out of the program. The price of the existing shares will adjust so that the value of the company is essentially unchanged (similar to a stock split), but the number of outstanding shares has increased, so the relative weight of your shares declines if you opt out of the program.  What is the benefit to the company of issuing Scrip Dividends? Companies may do this to conserve their cash reserves. Also, by issuing a scrip dividend, corporations could avoid the Advanced Corporation Tax (ACT) that they would normally pre-pay on their distributions. Since the abolition of the ACT in 1999, preserving cash reserves is the primary reason for a company to issue scrip dividends, as far as I know. Whether or not scrip dividends are actually a beneficial strategy for a company is debatable (this looks like a neat study, even though I've only skimmed it).  The issue may be beneficial to you, however, because you might receive a tax benefit. You can sell the scrip dividend in the market; the capital gain from this sale may fall below the annual tax-free allowance for capital gains, in which case you don't pay any capital gains tax on that amount. For a cash dividend, however, there isn't a minimum taxable amount, so you would owe dividend tax on the entire dividend (and may therefore pay more taxes on a cash dividend). The shareholders have a claim on the profits, but they may prefer that claim to be exercised in ways other than dividend payments. For example, they may want the company to invest all of its profits in growth, or they may want it to buy back shares to increase the value of the remaining shares, especially since dividends are generally taxed as income while an increase in the share price is generally taxed as a capital gain, and capital gains are often taxed at a lower rate than income. Generally speaking, each year, mutual funds distribute to their shareholders the dividends that are earned by the stocks that they hold and also the net capital gains that they make when they sell stocks that they hold. If they did not do so, the money would be income to the fund and the fund would have to pay taxes on the amount not distributed.  (On the other hand, net capital losses are held by the fund and carried forward  to later years to offset future capital gains).  You pay taxes on the amounts of the distributions declared by the fund. Whether the fund sold a particular stock for a loss or a gain (and if so, how much) is not the issue; what the fund declares as its distribution is. This is why it is not a good idea to buy a mutual fund just before it makes a distribution; your share price drops by the per-share amount of the distribution, and you have to pay taxes on the distribution. "They are similar in the sense that they are transferring money from the company to shareholders, but that's about it. There is different tax treatment, yes, but that's because they are fundamentally different. Dividends transfer money equally to all shareholders, but that also reduces the value of each share by the same amount, since it's cash out the door, which drops the value of the company. Shareholders are taxed on dividends at the capital gains tax rate. A buyback returns the cash to shareholders who decide to sell.  Other shareholders get a secondary benefit of now owning a slightly larger portion of the company since there are fewer shares outstanding.  Shareholders only pay tax if they sell shares for a gain. It that means when company buyback their stock, the stock price will definitely go up? Not necessarily. It depends on the price that the company buys back the shares for and what the ""opportunity cost"" of that cash is - meaning what else could the company have done with the cash that would have been better? Buybacks often happen in mature companies with undervalued stock prices and fewer opportunities for further investment.  If a company has an intrinsic value of $10 a share but its stock is trading at $8 a share, then it can instantly get a 25% ""return"" by buying back stock.  I use the term ""return"" loosely since the company does not actually profit from the buyback, but from the shareholder's perspective the company is worth more per share." If a company is public, and they record a 2016 profit of 100mil. Say there is shareholder A and shareholder B who are both wealthy and own 25% each of the company. Say the remaining 50% of shares are owned by a number of funds/small time investors.   So 2016 profits are 100mil, lets say there is a dividend. Can the company still award a larger share of profits to the two big shareholders? I.e. say 50 mil of the profits go into dividend payments and another 20 mil as retained earnings to be reinvested into future projects, can the remaining 30 mil of profits be split and given to shareholders A and B? Does my prior answer here to a slightly different question help at all? Are there capital gains taxes or dividend taxes if I invest in the U.S. stock market from outside of the country?