Dividend waivers for limited company shareholders

If a company has more than one shareholder, it normally pays dividends according to the rights attached to their shares.

So, if two shareholders each own 50 ordinary shares carrying identical rights, a dividend of £100 per share would normally mean that each receives £5,000.

But a shareholder does not have to accept every dividend they might otherwise receive.

They can sometimes waive their right to a dividend, leaving the company to pay the remaining shareholders.

Dividend waivers are perfectly legitimate, but they need to be handled carefully. HMRC can challenge arrangements where one shareholder repeatedly gives up dividends so that somebody else, particularly a spouse or family member, receives more income and pays less tax.

What is a dividend waiver?

A dividend waiver is simply an agreement by a shareholder to give up their entitlement to a particular dividend.

For example, suppose two shareholders each own 50% of a company.

The company wants to pay a £10,000 dividend, which would ordinarily mean £5,000 for each shareholder.

If one shareholder validly waives their entitlement, the dividend can instead be paid only to the other shareholder, depending on how the dividend has been declared and the company’s share rights.

The shareholder making the waiver does not receive the money and cannot later decide that they would like it after all.

Why waive a dividend?

A shareholder may simply not want or need a dividend at that particular time.

They may prefer to leave more cash in the business, or the shareholders may have different financial circumstances.

There is more to consider, as the waiver may mean dividends are paid instead to someone who pays less tax.

This often comes up in husband-and-wife companies and other family businesses.

When HMRC may take an interest

HMRC considers dividend waivers under the settlements legislation.

A waiver does not automatically cause a tax problem.

However, HMRC says the rules may apply where one shareholder gives up a dividend and another shareholder benefits as a result, particularly where the recipient is a spouse, civil partner or minor child.

You can read HMRC’s guidance on dividend waivers in its Trusts, Settlements and Estates Manual.

HMRC may also look at whether the company could have afforded to pay the same rate of dividend on all of its shares.

Suppose a company has £20,000 of profits available for distribution.

One shareholder owns 80 shares, and the other owns 20.

If the first shareholder waives their dividend and the company then pays £1,000 per share on the remaining 20 shares, the second shareholder receives the entire £20,000.

The company could not have paid £1,000 per share across all 100 shares because it would have needed £100,000 of distributable profits.

HMRC identifies this type of arrangement as one which may be caught by the settlements rules.

Repeated dividend waivers

HMRC may also take a closer look where the same shareholder waives dividends over several years.

Its guidance specifically mentions repeated waivers as a factor that may point to a settlement, particularly where dividends are consistently paid to a lower-tax family member.

An occasional waiver for a genuine reason is therefore rather different from a company regularly using waivers to determine which shareholder receives most of its profits.

What about the settlements legislation?

If the settlements legislation applies, the person who gave up the dividend can still end up paying the tax on it, even though somebody else received the money.

The tax treatment can therefore differ significantly from how the dividend was paid.

If a company genuinely wants the freedom to pay different dividends to different shareholders on a regular basis, properly structured alphabet shares may sometimes be more suitable.

These allow different classes of shares to carry different dividend rights, although the tax position still needs careful consideration.

When should a dividend be waived?

A waiver should normally be put in place before the shareholder becomes entitled to the dividend.

The timing differs between interim and final dividends.

HMRC’s guidance states that the right to a final dividend normally arises when the company declares it at a general meeting, while the right to an interim dividend normally arises when it is actually paid.

For that reason, the waiver should be dealt with before the relevant dividend entitlement arises, rather than afterwards.

Put the waiver in writing

A dividend waiver should be properly documented.

It will usually be made by a deed of waiver, signed by the shareholder before the relevant dividend entitlement arises.

The company’s records should clearly show which dividend was waived and by whom.

As with any dividend, the company must also have sufficient distributable profits available to make the payment.

Paying different amounts to different shareholders first and sorting out the paperwork later is not the way to do it.

Proceed with caution

A shareholder may have a perfectly valid reason to waive a dividend, particularly if they do not need the income at that time.

The position needs more care if waivers are used repeatedly, if the company could not have paid the same rate of dividend across all shares, or if the effect is to direct more income to a lower-tax family member.

For an occasional waiver, the position may be relatively simple. If waivers are likely to be used regularly, check the arrangement with an accountant or tax adviser first.