Dividend Waiver

Dividend Waiver

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We are a husband and wife company. We hold equal shares & dividends are shared equally. I take my dividend out of the company every year. For the last 5 years my husband has waived his right to a dividend, leaving the money in the company to build up so the company can invest in property. We are almost at the point where we have enough to invest. He is on a higher tax rate than myself, so it made more sense for him to leave his dividend in the company. We now understand that HMRC may view this process as a 'settlement', however there is no 'bounty' as we are leaving enough funds in the company to distribute dividends in equal shares. We understand that as an alternative we could restructure the share capital to form two classes of shares, each with different rights. By doing this one class of share could have dividend rights and the other none, allowing myself to be legitimately allocated a larger dividend than my husband. We understand that this is a more defendable solution, however we feel that the substance of transaction is essentially the same. Changing the structure of the share capital will create a cost, so we do not want to proceed if HMRC views the transaction as essentially the same as we are currently doing. Can anyone help me to understand why HMRC would view the introduction of different classes of share as preferable to a dividend waiver?

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By User deleted
07th Jul 2015 10:46

As long as you comply with company law and you declare the relevant dividends on the relevant tax returns, HMRC can "go whistle" (That's a nice way of putting it)

 

The issue that you will face is that 'complying with company law' is the tricky bit - ensuring that all the relevant documents/resolutions are filed - together with the fact that the company's articles may not even permit another class of share.

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Portia profile image
By Portia Nina Levin
07th Jul 2015 11:56

Ask your accountant

Your accountant will guide you through the pros and cons.

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RLI
By lionofludesch
07th Jul 2015 12:05

Sufficient Reserves

You also need to make sure that the company has sufficient reserves to pay the waived dividend, even though it was waived.  This is a cumulative process, so it's open to HMRC to claim that you only have sufficient reserves to pay a dividend this year because your husband waived his last year.

Portia's advice is particularly pertinent.  If you don't have an accountant, dividend waivers become a huge risk.

Everybody else's job always looks easy ..........

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Replying to Peter613:
Portia profile image
By Portia Nina Levin
07th Jul 2015 12:13

HMRC's view here

lionofludesch wrote:

This is a cumulative process, so it's open to HMRC to claim that you only have sufficient reserves to pay a dividend this year because your husband waived his last year.

That view would be incorrect. Each dividend waiver has to be considered separately on a proper analysis of the relevant company law.

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RLI
By lionofludesch
07th Jul 2015 12:27

Maybe

If TG's company would like to take on the role of test case.

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Jennifer Adams
By Jennifer Adams
08th Jul 2015 10:10

Alphabet shares v dividend waivers

You need to be v careful with either.

Its not a question that can be answered fully on such a forum as the answer depends on a number of variables. You say that for the last 5 years you have waived dividends - this is very dangerous. HMRC are v much against dividend waivers - they dont mind once or twice but not every year. You've been lucky not to have questions asked.

I have a number of clients who are in the exactly the same position as you and 'alphabet' shares are the way to go.

Another point is that you dont say who is the main earner?

The 'settlements' legislation is to be found under Chapter 5 of Part 5 of ITTOIA 2005, s640 which defines a settlement widely as including ‘any disposition, trust, covenant, agreement, arrangement or transfer of assets’. Therefore a ‘settlement’ situation may apply where there is  ‘arrangement’ of diverting income one to another, resulting in a tax advantage. Just the route you are contemplating. There have also been a number of tax cases brought by HMRC under this heading, the main one being the ‘Arctic Systems’ case.

You need someone who knows what they are doing before going down the Alphabet shares route as you will have to have the company articles amended to permit.

 

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