The following Owner-Managed Businesses guidance note Produced by Tolley provides comprehensive and up to date tax information covering:
In certain circumstances shareholders may wish to pay dividends other than in proportion to their shareholdings. This aim is typically achieved by one ormore shareholders not taking a dividend when it is declared. To effect this, the relevant shareholders must waive their right to dividends from the company prior to the dividend being declared.
Care must be taken when waiving dividends. HMRC may attack this where there is a loss of tax as a result.
In order to minimise the risk of HMRC scrutiny when effecting a dividend waiver, the following measures should be taken:
the waiver must be effected by a deed
the deed must be executed before the dividend is declared orpaid (otherwise the dividend will not be waived and the income will be taxed as the shareholder’s income anyway)
the waiver must be ‘commercial’
The first two points relate to ensuring that the dividend waiver is effective for the purpose intended. That is, if the waiver is not effected by deed ordone retrospectively, the shareholder will still be entitled to the dividend when it is paid. The shareholder will likely have under-declared dividend income on their tax return.
The third point relates specifically to the settlements legislation. HMRC will consider that the lack of commerciality of a waiver is an indication that there is an element of ‘bounty’ which is a sufficient characteristic indicative of a settlement.
When planning dividend waivers you should always consider the application of the settlements legislation. Where the rules apply, dividend income of another individual becomes income of the shareholder waiving their right to dividends. This will usually return dividend income to what it would have been had the waiver not been in place, though this is not necessarily the case.
The definition of a settlement is widely drawn to include any ’disposition’ or‘arrangement’. This would include any transfer of assets between parties, including rights to income. A dividend waiver may effectively transfer
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