Tribunal rules dividend waiver was settlement

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A recent First-tier Tribunal case has once again highlighted the dangers of using dividend waivers to reallocate income between shareholders, writes BDO tax director Chris Webber.

HMRC does not hesitate to challenge such arrangements under the settlements legislation, and companies should therefore avoid using this or other similar methods of allocating income to particular individuals.

In the Donovan & McLaren v HMRC case, two directors regularly waived dividends, enabling their wives to receive a higher proportion of the dividends...

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07th Feb 2014 13:34

Interesting case and it seems that the lack of sufficient reserves to waiver the dividend on multiple occasions was a major factor in their defeat. Would be interested to hear of other cases where HMRC have successfully applied settlements legislation to husband and wife companies where there are 2 different classes of shares, a structure that a number of us on AWeb advise and apply to our clients.

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07th Feb 2014 17:05


It would seem to be the key to have some solid commercial basis for any such future decisions. The implication in the judgement is that, had there been a commercial basis for the dividend variance, then it would have been acceptable.

Of course, the reallocation of shares in suitable proportions is still acknowledged as a workable strategy. I wonder why businessmen are not giving 99% of their shares to their wives. :-)

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07th Feb 2014 18:03

Search for patmore under FIT decisions on BAILII. It's a similar decision in respect of alphabet shares.

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10th Feb 2014 13:36

Dividend Waiver Query

I would like to ask a couple of things about this, if anyone can help. 

If I have a business where there are 3 directors with 1 share each, a father and two sons.  The father has retired from the business but still holds a share.  If there is sufficient profit to declare £45,000 worth of Dividends at £15,000 per share.  The Father does not want his dividends, thus signs a waiver so that both sons receive £22,500 dividends each. 

No-one on their current income will pay any higher tax, even if the father received his dividend.  If nothing to gain in taxes by HMRC, would this new tribunal ruling, impact on my client, if they wish to continue to waiver?

Thanks in advance


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10th Feb 2014 13:58

@ Carolynne

No.The settlement provisions (that are the subject of this case) only bite where if their are circumstances in which the settlor (or their spouse or civil partner) might receive the settled property (or any related property) or have it applied for their benefit.

So in this case the waiver is the settlement of income on the settlor's spouse. It doesn't then fall within the exemption for spouses, and so the income remains taxable on the settlor.

In the circumstances you describe, if the intention is that the sons will keep their dividends, there aren't circumstances in which the dad will receive the money (or anything that flows from it) or have it applied for his benefit.

That is subject to one caveat though. I'm assuming that the sons are at least 18. If an unmarried minor child receives income from a parental settlement of more than £100 (per settlor) in a tax year, then it is taxable on the settlor parent.

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10th Feb 2014 15:53

Dividend Waiver

Many thanks Steve, Phew!  Yes the sons are adults and both fully work in the business too.

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By jonsa
10th Feb 2014 16:23

@ Carolynne

Not sure if I have read this right.  Dividend is £15,000 each share.  If dad waives his dividend, each son receives £15,000, not £22,500.  £22,500 each would mean a dividend total of £67,500 initially and there may not be enough profits for that.

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17th Mar 2015 16:11


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10th Feb 2014 20:02

@ jonsa
If the company has available reserves of £45K and dad waives his entitlement to the forthcoming dividend, then the company can legitimately pay dividends of £22.5K to each son.

The point of the company not having sufficient reserves to distribute £22.5K without dad's waiver is just that dad has settled £7.5K on each son.

It's not a settlement that falls foul of the settlor-interested settlement provisions though, unless there's some arrangement for the money to go back to dad.

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11th Feb 2014 12:11

'Arctic Systems exception' variation

A further question - on the 'Arctic Systems exception' would it make any difference whether shares were subscribed at par on incorporation or whether they were gifted (husband and wife situation) after incorporation?

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11th Feb 2014 19:59

@ Carl
In Arctic Systems there was only a settlement of shares, being a right to capital and income (and voting). The wife then received her share of dividends.

With a waiver, there may have previously been a settlement of share, but it's the waiver that's the problem.

If the dividend actually paid to the wives couldn't have been paid without the waivers (because there wouldn't then have been sufficient reserves) the husbands have settled pure income on the wifes, by waiving.

It's a settlement of pure income on a spouse that fails the exception.

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12th Feb 2014 20:09

@ Carl

As I understand things, I think gift vs subscription would make a difference. For example, if the shares are gifted after incorporation, say after a year, when the company has been trading, accumulated reserves and has value, HMRC could argue the shares carry bounty and are a right to income and the gift has occurred in order to minimize the fee earner's higher rate tax liability. Therefore HMRC could attack the gift after incorporation under the settlement's legislation. Whereas shares at incorporation when the company has no value would not carry any bounty. The accountancy firm Nixon Williams has a really interesting pdf on income shifting.

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