Shares are often divided equally amongst shareholders when a company is created. However, this can cause problems where dividends are paid in proportion to shareholdings, as they may be payable to someone who does not need them or would have to pay higher-rate tax. If a shareholder does not want to receive a dividend, they can prevent this by using dividend waivers.
Dividend waivers – how to make them work
It is important to use dividend waivers carefully. HM Revenue and Customs (HMRC) may attempt to block their use unless the waiver has been carried out correctly, as they can be an efficient method of tax planning. HMRC often attack such schemes using anti-tax avoidance legislation.
To make dividend waivers work, the following steps must be taken:
- The waiver must be a formal choice by the shareholder entitled to the dividend, and be completed in an appropriate form on paper, dated and witnessed.
- The dividend waiver must be performed before the dividend is declared.
- If there is a business reason for the waiver, e.g. so that the company can keep funds for a particular reason, this will be more advantageous.
HMRC will closely examine dividend waiver agreements which are repeated, or serve to reduce the total tax payable – e.g. if a high-rate taxpayer waives the dividend and it is received by a lower rate shareholder – so it is advisable not to use waivers too often.