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From our newsletter - This month’s theme is Dividend waivers:

Posted on in Tax
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Dividend waivers are an extremely useful tool to help spread the burden of taxation particularly if shareholdings in a company are either not equalised between shareholders or where they are equalised but one shareholder has other sources of income such that paying dividends at what would be perceived to be the maximum level to one shareholder could give rise to an increased personal tax burden on another.

H M Revenue & Customs are aware of the taxation benefits of dividend waivers and if such waivers are in place will look carefully at them to ensure all proper procedures are in place. In order to minimise falling foul of an H M Revenue & Custom attack we will explore one or two matters which need to be taken into account.

Any dividend waiver should be effected by a deed in writing and executed before the dividend is paid or declared. In other words it should not be done retrospectively.

The dividend should also be for commercial reasons.

Whilst the first two measures are relatively easy to achieve, the latter is the one which causes most problem from the point of view of the “settlements” legislation and in particularly with husband and wife owned companies where the shareholding has not been equalised.

H M Revenue & Customs have been successful with a number of court cases on this very issue and thus there are lessons to be learnt to avoid being caught. The basic line of success for H M Revenue & Customs in these cases was that the arrangement gave rise to an element of bounty. In other words receiving something that you would not otherwise have received had it not been for the waiver.

This can perhaps best be seen from the case of Buck-v-H M R & C. In this case Mr Buck owned 9,999 shares and his wife 1. Mr Buck waived his entitlement to a dividend and paid a dividend to his wife of £35,000. The commerciality issue was that in order for Mrs Buck to receive (what we presume was a tax efficient dividend) £35,000 on her one share, the company would have had to have paid, prior to the execution of the waiver, a dividend of £349,965,000 (!!) to Mr Buck. Naturally it did not have the reserves to do so and thus it was held that the waiver was not the result of a commercial transaction and furthermore Mrs Buck received an element of bounty because she received more than she would have been entitled to under normal commercial arrangements. 

Although the case referred to above concerned a husband and wife, any joint shareholding arrangement is thought to be caught by these settlement provisions.

Dividend waivers should therefore be used with caution and commercial reasons ought to be present for their execution. H M R & C look for a number of indicators in forming their view a settlement exists which can be summarised as follows:

  1. There are insufficient funds available to pay the full dividend before taking into account the waiver.
  2. The shareholders who are waiving their dividend are regarded as seeking to benefit the non-waiving shareholders
  3. The non-waiving shareholder pays tax at a lower rate

As we said at the outset, dividend waivers are a useful tool but as can be seen from the above care should be taken when considering their use and professional advice sought.

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