Dividend waivers: Get the details right

HMRC's increasing focus on close companies has clouded the picture about what constitutes a settlement when share waivers are used. Jennifer Adams offers a simple-to-follow summary of the main technical requirements.

 

When to use a dividend waiver

Dividends are paid at the same rate for each category of share in accordance with the number of shareholdings held. Such inflexibility could mean the distribution of profits not being made in the most tax efficient manner or produce difficulties for a shareholder who does not want or need the payment - a dividend waiver may offer the solution.
 

How it works

The shareholder voluntarily waives entitlement to their share of the dividend, allowing the distributable profits to be divided between the remaining shareholders in the proportion of their holdings.
 
Scenario 1
ABC Ltd has distributable profits of £50,000 and wants to pay a dividend of £400
per share; the shares are held by three brothers as follows:
A         50 shares
B         25 shares
C         25 shares
 
A can waive his dividend and B and C will receive £10,000 each with no matters arising; A’s dividend remains within in the company.
 
Scenario 2
Same details as above with A waiving his dividend but B and C receiving an increased amount of £15,000 each (£600 per share). HMRC may challenge this waiver contending that A has settled £2,500 on each of his brothers and he will be taxed thereon on the grounds that an element of bounty is present. Although the actual total amount of dividend paid (£30,000) is less than the amount of distributable profit (£50,000), if A had not waived his dividend the company would not have had enough distributable profits to pay the increased £600 per share (£600 x 100 = £60,000).
 
Comments made in Any Answers show inconsistency in HMRC’s approach to dividend waivers despite instruction given in the ‘Trusts, Settlements and Estates Manual’ (TSEM 4225).

The full article covers:
  • When will HMRC become interested?
  • Specific technical points
  • Other options?

About the author
Jennifer Adams FCIS TEP ATT is a freelance writer and author specialising in tax and company secretarial issues; she can be contacted at Abacus Business Solutions. The information contained in this article is intended to provide for general educational use and information only. It is not intended to advise or recommend any particular course of action or opinion. The reader should not act or rely on any information contained therein without seeking independent legal advice.

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Comments

Pardon my ignorance on dividends

jobar | | Permalink

Following on from the scenario of different classes of shares ie A and B, can these differing classes also be paid a differing rate of dividend. So allowing all shareholders to get something, as long as the total paid falls within the amount able to be paid.

Alphabet shares

firtrees | | Permalink

What is the correct procedure to get shares reclassed as A,B,C etc?

Useful (and correction)

Ian-M | | Permalink

A useful summary, especially regarding HMRC's take on waivers.  Thanks Jennifer.

BTW "Buck v HMRC also confirmed that a company may legally distribute all of its *shares* to a single shareholder "...

... should this not read "distributable reserves" rather than "shares" ?

John Stokdyk's picture

*Minor adjustment to original text

John Stokdyk | | Permalink

Firtrees - Thanks for raising the point about shares and distributable reserves.

Having consulted Jennifer, she replied that either formulation could apply: "One person can own all the shares in the company (and therefore receive all the distributable reserves), but Buck v HMRC did also confirm that a company can distribute all its reserves to a single shareholder if there is more than one shareholder."

Tom 7000's picture

Waiver

Tom 7000 | | Permalink

It says a waiver must be witnessed, is this correct?

 

Anyone want to confirm it

 

jon_griffey's picture

Dividend waiver

jon_griffey | | Permalink

Tom - my understanding is that as a dividend waiver is something done for no consideration, to make it legal it needs to be in the form of a deed and therefore witnessed.

My understanding is it does

LancsAccountant | | Permalink

My understanding is it does need to be witnessed, and we gat all our witnessed.

class or not

SE_Confused | | Permalink

1. in the case of a small LTD with two shareholders if the split is 50/50 where we declare dividends correctly (e.g. £500 each on a profit of £1000) then A waives his dividends then it does not matter whether we had them in different classes or not - am i correct?

I want to avoid the complication of creating different classes of shares only for the purpose of distributing dividends to just one shareholder.

 

also ''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.''

2. can we later give class B shares dividends rights? - wouldn't that be looked for past periods as falling into settlements rules? 

many thanks in advance 

What is the mechanics of re

kksong | | Permalink

What is the mechanics of re-categorise the existing shares (2:1) into A and B shares so that each will receive equal dividend right? Anyone please.

Re- categorise shares?

pauljohnston | | Permalink

What needs to be done is

1 Create the new classes of shares having regard to the articles and then an EGM so that all shareholders can approve.

2Offer all shareholders the opportunity to take A or B shares or  amixture in exchange for the current ordinary shares

3 Effect issue of the new share certificates and cancellation of the old.

Can I recommend Steve O'Neil at the Business tax centre www.btw-nw.co.uk as one such person who is able to provide all the minutes and guidance etc for a fee ofcourse

 

ssvshankar's picture

Accounting treatement

ssvshankar | | Permalink

Hi there,

I have a doubt with regard to the accounting treatment of the dividend waived. Taking the scenario 1 as an example, total dividends proposed is 40K and out that 20K will be paid. The retained A's dividends of 20K will be available as distributable profit for the following year. What will be the accounting entries for the waived dividends, should it be added to the retained profits of 10K when the next year's accounts is done.

 

Please some one clarify the accounting entries side of it.