Dividend waivers: Get the details right
Dividend Waivers Key Points
- A dividend waiver can bring flexibility to profit distributions
- Shareholder can voluntarily waive their entitlement to a share of the dividend
- HMRC’s approach can be inconsistent and there are traps for the unwary
- Use waivers sparingly, and ensure a commercial reason is documented
When to use a dividend waiver
How it works
When will HMRC become interested?
- A formal deed of waiver is required, which must be signed, dated, witnessed and lodged with the company
- It is imperative that the waiver be in place before the right to the dividend arises because a waiver after payment is a transfer of income which constitutes a settlement. Therefore an interim dividend must be waived before being paid; a final dividend is payable once approved at an AGM unless confirmed to be payable at a future set date.
- HMRC would prefer to see a commercial reason for the waiver. Therefore, best to state in the deed that the waiver has been made to allow the company to retain funds for a specific purpose.
- Dividend waivers should be used sparingly - don’t waive every year. HMRC will look more closely at arrangements which are repeated, the practical effect of which reduces the overall tax payable.
- Nothing should be given in consideration of the waiver.
- A waiver may cover a single dividend, a series of dividends or dividends declared during a specified period of time.
- Ensure that the dividend declared per share times the number of shares in issue does not exceed the amount of the company’s distributable reserves (see scenario 2 above).
Are there any other options?
- The shareholder who does not want the dividend will have to transfer his shares to another shareholder(s) before the dividend is declared. This will mean no further involvement in the company and would be more difficult to reissue shares to him at a later date; the procedure also needs Board approval.
- Re-categorise the shares into A and B shares with the same rights except for dividends; then declare a dividend on the A share only. The owner of the B –type shares will not receive dividends for the time being but remains involved with the company.