Dividend waivers can be an effective tool in tax planning – if executed correctly.
A dividend is a payment from a limited company’s profits to its shareholders. The amount each shareholder receives will depend on the percentage they own in the company. When a shareholder does not wish to receive a dividend, this can be effected by the execution of a dividend waiver. The use of such waivers can be an effective tool in tax planning. Unless a dividend waiver is executed in the right way, HMRC is likely to use anti-avoidance legislation to attack the scheme.
Settlement legislation can apply where a company with few shareholders declares a dividend when one or more of the shareholders have waived their right to a dividend in circumstances where other shareholders may benefit. HMRC can argue that the person making the waiver has indirectly provided funds for an ‘arrangement’ or ‘settlement’ by giving up a sum to which he or she is, or may become, entitled.
If a dividend waiver is successfully challenged by HMRC, the result is that those individuals are taxed based on the total paid dividend apportioned according to shareholdings, effectively ignoring the waivers.
When is the settlement legislation likely to apply?
- If the profit is insufficient to allow the same rate of dividend to be paid on all issued share capital.
- There has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
- The same rate would not have been paid on all the shares in the absence of the waiver.
- The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.
Where the person benefiting under the arrangement is not a spouse, civil partner or minor child, the settlement legislation will not apply unless there are arrangements under which the money will be paid, or used to benefit the settlor.
How to avoid the distribution being challenged
- Deed of waiver should be formally executed, and signed by shareholders who would otherwise be entitled to receive the share income. The deed should be dated, witnessed and lodged with the company.
- The dividend waiver must be executed before the right to the dividend arises. Interim dividends must be waived before payment; final dividend should be waived before the shareholders approve the final dividend.
- Dividends paid to a spouse should be paid into their own separate bank account (as opposed to the couple’s joint account).
- It is always better if there is a commercial reason for the dividend to be waived –such as enabling the company to retain funds for a specific purpose.
- It is unwise to use dividend waivers too frequently. A habit of waiving dividends will increase the risk of questioning from HMRC.
- Never backdate board minutes and dividend vouchers, as the documents will be legally void and can constitute a criminal offence.
Dividend waiver example
Waiver of dividend
I, (Insert name) of (insert address), the registered holder of (insert number of shares and class) of (insert name of the company), hereby waive all rights to payment of the interim/final (delete as applicable) dividend of (£insert amount) per share declared by the Company and its directors on (insert date) in respect of the year ended ([insert company year-end date).
Date: (insert date)
Signed by: (insert signature)
Witnessed by: (insert name, address and signature of witness)