Dividend waiver: what you need to know

You’ve decided to share your profits with your shareholders by issuing a dividend, but what if not everyone wants to take it?

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:

1. 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.
2. 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
3. The waiver may be for a set period or may be open ended

Download our Deed of Waiver template

Who can be a witness?

The witnesses to a deed do not need to be lawyers or other legal professionals. They can be any adult who is not related to the shareholder and is not a party to the deed. However, it is important to choose witnesses who are reliable and who are not likely to be biased in any way. It is therefore prudent to choose a witness who is not, for example, a fellow shareholder in the company or one of its directors. This is to avoid potential conflicts of interest and to stay on the right side of HMRC (see below). Apart from that, the rules are simple:

• A deed must be signed by the person executing it in the presence of a witness who attests the signature.
• The witness must sign the deed in the presence of the person executing it.
• The witness must write their name and address on the deed.
• The witness must state in the deed that they saw the person executing it sign the deed.

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.

ref. Trusts, Settlements and Estates Manual

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.