You’ve decided to share your profits with your shareholders by issuing a dividend, but what if not everyone wants to take it?
Why waive your right to a dividend?
There are various reasons why shareholders may wish to create a dividend waiver:
- It may be that a founder is no longer active on a day-to-day basis with the company but doesn’t want to relinquish their stake in the company completely by selling their shares. In this case the founder shareholder may opt to waive their right to a dividend when profits are distributed amongst shareholders
- Alternatively, a family company may wish to share some of its profits with family members whilst retaining the remaining profit in the company to fund further growth. In this case the parents may waive their dividend while paying dividends to their children
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Deed of waiver form
If you or your shareholders need to waive dividends, then there is a process to follow to ensure that the correct records are kept:
- For final dividends, the waiver must be in place BEFORE the right to receive a dividend arises. For interim dividends then it must be in place before the dividend is paid.
- A Deed of Waiver is required for all shareholders waiving their dividend. This needs to be signed by the shareholder, witnessed and returned to the company
- The waiver may be for a set period or may be open ended
The HMRC view
Care must be taken that there are sound commercial reasons for waiving a dividend. If HMRC suspect that a dividend waiver may be being used for the avoidance of tax, then they are likely to take an interest.
Dividend payments are taxed at a lower rate than employment income due to national insurance contributions not being payable. The directors of a company may opt to reward their staff through payment of a dividend but waive their own dividend to increase the size of the dividend pot. If HMRC consider that the dividend payment is being made in lieu of salary, then they may take the view that the dividend should be taxed at the employment rate.
HMRC may test the dividends arrangement against the settlements legislation. HMRC state that the settlements legislation is likely to apply if:
- The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital.
- Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
- There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.
- The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.
- The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.
There are legal precedents where companies owned by married couples have used a dividend waiver to pay the party who is in a lower tax band a greater proportion of the profits. For example, Mr and Mrs Smith operate a property management business. Mrs Smith holds 80 shares and Mr Smith 20. Mrs Smith waives her right to any dividend. Having made a profit of £3,000 they decide to pay a dividend of £100 per share and Mr Smith receives a dividend of £2,000.
In this example HMRC are likely to use the Settlements legislation to challenge the payment as;
- The company would be unable to pay the same rate of dividend to all shareholders if Mrs Smith had not waived her right to the dividend
- Mr Smith the “non-waiving” shareholder is someone who Mrs Smith would wish to benefit from the waiver
- Mr Smith is in a lower tax band than Mrs Smith and therefore would pay less tax than the waiving shareholder
A company may feel that rather than waiving dividends, an alternative approach would be to issue two share classes with different rights, one eligible to receive dividends and one not. However, this arrangement also risks being challenged by HMRC if the company’s retained profits were not enough to pay the dividend against all issued shares across the share classes.
To make sure that your dividend waiver does not draw the attention of HMRC, ensure that:
- The dividend waiver is being made for a real business benefit and record this as part of the Deed of Waiver
- The waived funds are retained by the company and not simply divided up between the shareholders who are receiving the dividend
- The shareholder who is waiving their right to a dividend would be satisfied with the arrangement if the other shareholders were unrelated third parties (i.e. not people who the waiving shareholder would particularly wish to benefit)
Issuing dividends with dividend waivers
When creating dividend vouchers, Inform Direct makes it easy to identify shareholders who have signed a waiver. The system allows you to identify which shareholders have waived their dividend and whether this is for all the shares that they hold or just a proportion of them.
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