Q: My client would like to waive his dividends. He has significant other income and does not need dividend income that is paid from his family company every year. Are dividend waivers likely to be challenged by HM Revenue & Customs? What can we do to create an effective dividend waiver?
A: Generally, the aim with a dividend waiver is for certain shareholders to not take 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. HMRC may attack dividend waivers where there is a loss of tax as a result.
To minimise the risk of challenge by HMRC, the following measures should be taken:
• The waiver must be effected by a deed
• The deed must be executed before the dividend is declared or paid (otherwise the dividend will not be waived and the income will be taxed as the shareholders’ income anyway)
• The waiver must be ‘commercial’.
The third point relates 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, consideration should always be given to the settlements legislation. A dividend waiver may effectively transfer a right to income and is therefore susceptible to the settlement provisions. Where the rules apply, dividend income of another individual becomes income of the shareholder waiving his right to dividends. This will return the dividend income to what it would have been had the waiver not been in place.
If dividend waivers are to be used, it would be beneficial to document and evidence any commercial reasons that the shareholder has for waiving the right to dividends. The standard of proof is on the balance of probabilities. The quality of evidence provided by the taxpayer may prove crucial should the matter be considered by a tribunal. As always, contemporaneous evidence is likely to be considered more persuasive than evidence produced retrospectively.
Ben Chaplin is managing director of Taxwise
