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Business Tax  •  Personal tax  •  Tax Planning  •  Tax Relief

When to waive goodbye to a shareholder dividend

By RJP LLP on 18 October, 2019

When a limited company makes a profit, this is often paid out as a dividend to shareholders as a return on their investment with the directors deciding on the dividends to be voted in any accounting year.

If a company pays a dividend, all the shareholders are entitled to the same amount of dividend per share based on the number shares they hold. The only difference in the amount of dividend paid to different shareholders will be in relation to the different number of shares they hold; they cannot otherwise be paid different levels of dividend unless they hold different classes of shares or unless a shareholder waives their entitlement to a dividend.

Example: Dividend waiver

Mr and Mrs Smith are shareholders of a family company. Mr Smith holds 70% of the shares with Mrs Smith holding the remaining 30%.

Mr Smith is a higher rate taxpayer thanks to other sources of income, whereas his wife is a basic rate taxpayer. He may not want to take a dividend, because it might for instance impact their entitlement to another allowance, such as the Child Tax Credits. Rather than Increase his income to the detriment of his tax allowances and liabilities, Mr Smith decides to waive his entitlement to the next dividend declared by the company by making a dividend waiver.

A dividend of £20,000 is declared by the company; Mr Smith’s entitled would have been £14,000 (£20,000 x 70%) but he has waived his entitlement to the next dividend and so a dividend is paid only to Mrs Smith who receives £6,000 (£20,000 x 30%)

What to do if you decide to waive your entitlement to a dividend

In any limited company, if a shareholder decides not to take a dividend in favour of waiving their entitlement, they need to make a formal ‘deed of waiver’ election. This should be signed and witnessed as an official record held by the company. Otherwise, HMRC could potentially challenge it in the future and argue the dividend stands.

A record of the discussion when the dividend waiver was agreed – minutes from a Board meeting - should be available.

The waiver needs to have been signed before the right to a dividend arises, to avoid a situation whereby it is deemed to be a false arrangement or a settlement on another shareholder for tax purposes. There should also be a commercial reason for waiving a dividend.

The amount of dividend being waived needs to actually be available to take – i.e. the company must have enough distributable reserves available to pay all dividends, irrespective of the fact that some may be waived. So in the above example the company must have had profits available to distribute of £20,000, even though only £6,000 was paid by way of dividend.

What is a good ‘commercial reason’ for waiving a dividend?

The best reason for waiving a dividend waiver is to leave the profits in the company. For instance, to invest in machinery which will improve profitability in the future and take advantage of enhanced capital allowances, such as the annual investment allowance.

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Capital gains tax is due to be reviewed by the government and if a CGT rise is announced, the new rates may become effective from the next tax year on 6 April 2021. Take advice now if you are thinking of selling property or have other assets giving rise to a capital gains tax liability.