Dividends are paid at the same rate for each category of share based on the number of shares held. This inflexibility could mean that profits are not being distributed in the most tax-efficient manner. It could also cause difficulties for a shareholder who does not want or need the payment. In these circumstances, a divided waiver may be the best option.

TAX EFFICIENCY

Some examples of tax inefficiency can arise when a shareholder is a higher rate taxpayer and the others are either basic rate taxpayers or non-taxpayers.

There may also be tax inefficiency if, by taking the dividend, the shareholder will be affected by the higher income charge on Child Benefit. If the shareholder is claiming Child Tax Credit as part of their total income, they may prefer to waive their dividend.

In particular, shareholders of smaller companies may choose to waive their rights to dividends in order to retain money in the business.

When waiving a dividend, the shareholder voluntarily gives up their entitlement to their share of the dividend. This allows the distributable profits to be shared between the remaining shareholders in proportion to their shareholding. The shareholder who has waived their dividend will receive nothing and their share will remain in the company’s bank account.

During a specific period of time, a waiver can refer to both a single dividend or a series of dividends. An interim dividend must be waived before being paid, and a final dividend must be waived before being approved. This is because a waiver afterwards could be interpreted as a ‘settlement’.  

Anti-avoidance provisions are put in place for the settlement rules and these apply where the person gifting an asset (settlor) retains an interest in the asset given away and the settlor or settlor’s spouse benefits from the gifted asset.  A ‘bounty’ is required for the provisions to apply.

The transfer could also be considered a transfer of value for inheritance tax purposes and even ‘value shifting’ for Capital Gain Tax purposes.

HMRC CHALLENGE

HMRC are entitled to challenge any dividend waivers. In the past, challenges have usually been a result of payments made where the waivers have been paid to a company owner’s spouse or its trustees. If the waiver is considered to create a tax advantage, HMRC would likely make the ‘settlement’ point at this stage.

HMRC are more likely to investigate when the level of retained profits in the company is not enough to allow the same rate of dividend to be paid on all issued share capital. HMRC may also investigate where there is evidence that suggests the same rate could not have been paid on all the issued shares in absence of the waiver.

A waiver must be a formal deed and must be signed, dated, witnessed and sent to the company. The drafting of a deed is a reserved activity, which only a member of The Law Society or the Bar can conduct.

To avoid an HMRC investigation, it is suggested that the deed should state the waiver has been made to allow the company to retain funds for a specific purpose. This reinforces that there is some commercial reason for the waiver.

USE THEM SPARINGLY

If you need to use a dividend waiver, use it sparingly. Don’t fall into the habit and waive each year. HMRC look for patterns and trends and will spot if any arrangements are repeated. This is because the practical effect of continued waiving could reduce the overall tax payable.

Waivers should last no longer than twelve months. The use of a long-term waiver could reduce the value of that shareholding. As a result, this could increase the value of those shareholdings that can enjoy higher dividends as a result.

If waivers are expected regularly, shareholders should consider the creation of Alphabet shares.

Dividends can be complex, and it’s important to get them right. Speak to an accountant to ensure you’re getting the best advice.

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