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What is a dividend waiver?
A waiver is where one or more shareholders decide to waive their rights to be paid a dividend. Every shareholder is entitled to be paid in relation to the number of shares they hold.
To avoid the distribution being challenged by HMRC a number of procedures should be followed:
- Ensure the Deed of Waiver is formally executed and signed by shareholders who would be entitled to receive the share income.
- Prior to the right to receive a dividend arises, ensure the waiver is in place.
- A waiver should only be used for genuine commercial reasons.
- A waiver must not create a situation where the dividend can be seen as a ‘settlement’ and therefore used for tax avoidance.
Dividend waivers are only effective if executed by deed because there is no consideration to support a contract.
Recent CIOT guidance explains that the drafting, preparation, and execution of deeds is a ‘reserved activity’ under the Legal Services Act 2007. This can only be carried out by an authorised or exempt person. As a result, all waivers/deeds must be drafted by lawyers.