Dividend Waivers - The Best Tax Planning Opportunity

Dividend Waivers: Great tax-planning opportunity, but Beware!

Shares are normally distributed fairly equally among the shareholders when a company is first set up. As the company grows and, hopefully, prospers, the shares may be distributed in other ways, but the wellbeing of the company must always be at the forefront of the decision.

A blog of earlier this year highlighted the importance of using share waivers selectively. What should a shareholder do, then, if dividends are due but s/he does not need the money or if the payment is liable to take her into the higher-rate tax band; should the shareholder waive her entitlement to a dividend?

Dividend waivers

The shareholder can legally execute a dividend waiver as an effective tax-planning tool; however, for this very reason HMRC tend to keep a keen eye on their use. Unless a dividend waiver is executed in the right way, the practise can fall foul of anti-avoidance legislation.

Execution of dividend waivers

There are two critical points to bear in mind before executing a dividend waiter

1. Protect yourself: there should be a conclusive commercial reason for the dividend to be waived. This might be that the company needs to retain funds for some specific purpose.
2. Occasional use: another very important consideration is how frequently dividend waivers are used by the shareholders of a company. Repeated waivers, which effectively reduce the overall tax payable, almost certainly will attract unwanted attention from HMRC. Suffice to say that you should think carefully before you leap into a dividend waiver.

The steps you should take are as follows:

• Inform you account manager of your intention to waive a dividend: discuss whether you have previously waived a dividend and discuss the commerciality of the current waiver.
• The dividend waiver must be a formal election by the person entitled to receive the dividend. It must be done in an appropriate paper form, a Deed of Waiver, and be signed, dated and witnessed. Ideally, it should include explanation of the commercial reason for waiving the dividend. Please click here for the standard form.
• The waiver must be executed before the dividend is declared.
• The Deed must be filed with the company’s statutory records.

So, before closing, remember the following rules about dividend waivers:

1. A formal Deed of Waiver is required
2. The deed must be dated before the dividend arises
3. There must be a good commercial reason for the waiver, ideally stated in the deed
4. Only waive your right to a dividend occasionally, make sure it does not become a habit
5. Never offer inducements to encourage dividend waivers

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.