Dignity, Britain's biggest provider of funeral services, based in Sutton Coldfield, is returning £1 a share, £80 million in all, to its shareholders in August.
The move comes after it raised £86 million from an issue of bonds in February based on its future cash flow.
The refund will take the form of an issue of "B" shares, which the company will redeem immediately rather than a share-back or a taxed dividend.
"Hopefully it will be treated as capital, not income and the taxman will agree," said Peter Hindley, Dignity's chief executive. "So for private shareholders only capital gains should be payable. For institutions it will make no difference."
Private shareholders should therefore be able to take advantage of their annual tax-free allowance, for capital gains, £8,200 this year. In view of this capital refund there will be no final dividend this year. Dignity has paid an interim dividend of 2.75p.
The refund came as no surprise to the stock market, so the shares stuck close to their overnight price of 478p most of yesterday, only to tumble to 460p in the final minutes of trading.
The company's broker, Panmure Gordon blamed the tumble on "a market technicality".
On top of the refund, another £10 million, half of it from the bond issue, has been earmarked to eliminate most of the deficit from Dignity's final salary pension schemes, one of which is still open to present employees.
Despite a lower than expected death rate last year, Dignity's underlying profits rose 17 per cent to £25.9 million, while its revenues were six per cent higher at £143.2 million.
Employees' bonuses announced at the end of 2005 totalled £800,000, up from £600,000 the year before.
Dignity generated £49.5 million of cash from its operations including its 22 crematoria.
From this it plans to spend £10-12 million a year on acquisitions, usually independent businesses conducting at least 250 funerals a year. Last year it acquired ten funeral homes and closed three.
"We are looking for well-established firms, bigger than an individual's reputation," said Richard Connell, chairman.
Acquisitions accounted for about half last year's growth in revenue.
The number of prearranged, pre-paid funeral plans market through Age Concern, AXA and Royal London, as well as Dignity's own offices, rose to 181,200 from 170,200 during the year.
Money paid for these is held in a trust, which seeks to invest it to cover the rising cost of funeral services. Although Dignity receives no cash up-front, the plans under-pin its future revenues.