Dividend Waiver

[Idilkachore]

Hi

My wife (director) runs a small limited company from home. We are both equal shareholders.
We like to issue dividends. However, I like to waiver my dividend as any dividend above £2k will put me into higher tax bracket (I work for another company). Am I correct in saying this is not allowed? Should both shareholders be paid equal dividend?

Thank you

 

[Newchodge]

Hi

My wife (director) runs a small limited company from home. We are both equal shareholders.
We like to issue dividends. However, I like to waiver my dividend as any dividend above £2k will put me into higher tax bracket (I work for another company). Am I correct in saying this is not allowed? Should both shareholders be paid equal dividend?

Thank you

If they have the same class of shares, yes.

 

[Fagin2021]

Although you are entitled to an equal dividend I think you can sign a 'deed of waiver' to waive it - and that is often done for exactly the reason you describe..

 

[Idilkachore]

Thank You.

 

[Bobbo]

Potentially vulnerable to attack from HMRC if the full dividend could not have been paid to all shareholders, in particular as this is clearly tax motivated.

 

[Maxwell83]

Do you have an accountant?

I can tell you what mine told me when I had this idea (which seemingly almost every husband & wife company suggests to him at some point for the exact same reasons) - its not a good way to do it.

You're waiving your dividend on what sounds like a regular basis, which increases the company's distributable reserves. This means that your wife is able to take more dividends than she would otherwise, because your waived dividends are boosting the profit pot.

HMRC can argue that this is a settlement under settlements anti-avoidance legislation, the result being they tax some of her income as if it was yours at the higher rate.

Two cases to look up if you're interested where this happened (and HMRC won the cases):
Donovan and McLaren v HMRC [2014] UKFTT 048 (TC), and Buck v HMRC [2008] SPC00716

You are much better to set up different share classes, my accountant referred me to a specialist who did this for my company. Its a much safer way to pay dividends in a somewhat flexible manner for tax planning.

 

[Idilkachore]

Not a good one but we do have an accountant. We're looking for another accountant.

I think share classes or even better one shareholder (wife) may just be the option. Our company is really a very small company. It hardly makes much profit. We don't really want to get into a situation where HMRC is putting penalties on us as we won't have the finances to fight the case in a court.

You're comments are highly appreciated.

 

[eteb3]

Consider an LLP: much more flexible, and if biz doesn’t make much profit then youre not going to lose much by not being able to pay yourselves in dividends.

To quote almost verbatim from HMRC Partnership Manual: “a partnership entered into solely for tax purposes is not thereby a bogus partnership”. Compare that with the complexities of dividend waivers, settlement legislation, etc.

 

[Gyumri]

Far simpler for you to simply transfer your shares to your wife for "natural love and consideration" then the issue of waiving a dividend wouldn't arise. There is no CGT on transfers between spouses.

You're waiving your dividend on what sounds like a regular basis, which increases the company's distributable reserves.

That cannot be right. They (the company's profits) would remain exactly the same.

Are Your Dividend Waivers Legal? - Tax Insider

www.taxinsider.co.uk

 

[fisicx]

Far simpler for you to simply transfer your shares to your wife for "natural love and consideration" then the issue of waiving a dividend wouldn't arise. There is no CGT on transfers between spouses.

Would still be seen as tax avoidance by the HMRC.

 

[eteb3]

That cannot be right. They (the company's profits) would remain exactly the same.

Surely not? If there are distributable reserves of £1000, and husband waives his dividend, wife receives £500 that would otherwise have been due to him.

From your link:

• waivers, where one spouse benefits another for tax advantages, are open to attack by HMRC under the income tax ‘settlements’ legislation.

From AccountingWeb:

• [A problem arises where a]lthough there are sufficient retained profits to pay the same rate of dividend per share for that particular year, there has been a run of waivers over a number of years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.

EDIT: I see what you mean now. Think you and Maxwell83 both right, you strictly and he if we consider HMRC ?requirement to ensure waived divis stay in the ltd, not redistributed next time.

 

[Gyumri]

Surely not? If there are distributable reserves of £1000, and husband waives his dividend, wife receives £500 that would otherwise have been due to him.

That doesn't alter the profits of the company even if both directors waive their dividends. I think there is also a difference between waiving the right to receive a dividend and waiving a declared dividend.

Simply transferring one's shares to the spouse could never be seen as tax evasion. It might serve as tax avoidance, but that has always been held to be perfectly legal. There is a distinction between the two expressions.

 

[eteb3]

That doesn't alter the profits of the company even if both directors waive their dividends.

It doesn't (obviously, it doesn't). But if husband waives, and wife receives what would have been his, she has received a dividend in excess of what she could have received but for the waiver. I don't know if that's legal in company law terms (looks ok), but in tax terms it's going to get caught by anti-settlement provisions: ITTTO s. 624(1), income is husband's and taxed as such, even if paid to wife.

 

[eteb3]

Simply transferring one's shares to the spouse could never be seen as tax evasion.

s. 626:

(4) A gift [to a spouse] is not an outright gift ... if—
(a) it is subject to conditions, or
(b) there are any circumstances in which the property, or any related property—
(i) is payable to the giver,
(ii) is applicable for the benefit of the giver, or
(iii) will, or may become, so payable or applicable.

If wife's dividend is (or may be) applied to a joint mortgage, that looks exactly like "related property ... applied for the benefit of the giver".

And I think the burden is on the taxpayer to show that the correct tax has been paid? There must be circs where the taxpayer can be confident they can, but it looks tricky.

 

[NicoJ]

That doesn't alter the profits of the company even if both directors waive their dividends. I think there is also a difference between waiving the right to receive a dividend and waiving a declared dividend.

Simply transferring one's shares to the spouse could never be seen as tax evasion. It might serve as tax avoidance, but that has always been held to be perfectly legal. There is a distinction between the two expressions.

I think this is correct.

The divs - the latter would be a settlement and therefore taxable on the individual waiving the div.

Shares - although HMRC won't like it, I think if it is done correctly I believe HMRC would be unable to legally challenge it.

My preferred route would be alphabet shares rather than the transfer but thats a personal choice.

One thing that hasn't been mentioned is that a waiver is a deed, so is a reserved activity. A simple letter by the shareholder will not be sufficient, you will need a solicitor to draft this for you.

 

[eteb3]

Shares - although HMRC won't like it, I think if it is done correctly I believe HMRC would be unable to legally challenge it.

"If" doing a lot of work there! The legislation is pretty broad.

a waiver is a deed, so is a reserved activity

What's a reserved activity?

It may be advisable to get a solicitor to draw it up, but there's no need to if you have a precedent you're confident in.

All that's required for a deed is that you sign it "Signed as a deed [signature] [date]", in the presence of a witness who says "Witnessed by [name] [signature]". See here.

 

[Gyumri]

As I mentioned to avoid these issues the OP can simply transfer his shares to his wife and then he would not be entitled to receive any dividends.

See also here for clarification of the issues involved if the OP wants to remain a shareholder:

Dividend waiver: what you need to know - Inform Direct

Your shareholders may want to waive their dividends. Inform Direct provides a dividend waiver template and makes the process easy through our online tool

www.informdirect.co.uk

 

[NicoJ]

"If" doing a lot of work there! The legislation is pretty broad.


What's a reserved activity?

It may be advisable to get a solicitor to draw it up, but there's no need to if you have a precedent you're confident in.

All that's required for a deed is that you sign it "Signed as a deed [signature] [date]", in the presence of a witness who says "Witnessed by [name] [signature]". See here.

What does Reserved legal activities mean? This is a defined term in the Legal Services Act 2007 and means: the exercise if a right of audience; the conduct of litigation; reserved instrument activities (relating to the transfer of land); probate activities; notarial activities; the administration of oaths.

A deed falls under notarial activities.

 

[fisicx]

As I mentioned to avoid these issues the OP can simply transfer his shares to his wife and then he would not be entitled to receive any dividends.

Yes you can. But HMRC may well ask questions.

Nobody is suggesting you can’t transfer shares or whatever. It’s the implications of doing so that need to be considered.

 

[Gyumri]

There are no implications for transfers of shares between spouses or civil partners and nothing that needs to concern HMRC.

A tax payer is always free to reduce their tax liabilities as they see fit and if the OP has no shares then that's the end of the story.