Dividend Waivers

Would like an opinion this - thought I knew the rules until recently!

Just took on a client from another accountant.

They have applied a dividend waiver as follows:

2 shareholders each have 1 share.  Dividend Declared - £200k.  Shareholder 1 receives his 50% share so £100k.

Shareholder 2 (and this is the bit that gets me) PARTIALLY waives his entitlement to the dividend, so only receives £50k.

It get worse.....He then GIFTS his other £50k to shareholder 1 and this is taxed on shareholder 1 as a dividend!

So to summarise, a dividend waiver goes in, shareholder 1 receives (and is taxed on) £150k and shareholder two receives (and is taxed on) £50k.  All this from a 50:50 shareholding!

This seems like utter nonsense to me!  To me a dividend is paid out to shareholders on the basis of their shareholding.  If a dividend waiver is put in place, the shareholder waives his entitlement to that dividend and the reserves remain in the company.  So thats the first fault - partial wavers, as far as i'm concerned, don't exist!  Secondly, he can gift the dividend if he wants, but it is still taxable on the shareholder who is due to receive the dividend, not the beneficiary of the gift!

Can someone confirm i've not lost the plot or tell me i'm not up to speed with these things!

Thanks.

Short description: 
Am I losing the plot?

Comments

johngroganjga's picture

I agree that you can't waive

johngroganjga |

I agree that you can't waive and gift the same dividend.  If you have waived it you have nothing to give.

But end result is the same, is it not, as declaring a dividend of £150,000 per share, subject to a waiver by Shareholder 2 of 2/3 of his/her entitlement.

If a partial waiver makes sense in law, which it may or may not do, then a reasonable result has been achieved albeit by a misconceived route.  No doubt you will ensure that greater clarity is brought to bear next time.

A simple share splitting would be an easy way to avoid the need for partial waivers.   

Steve Kesby's picture

I don't suppose...

Steve Kesby |

... shareholder 1 and shareholder 2 are married to each other or are each others civil partners?

JCresswellTax's picture

johngroganjga

JCresswellTax |

Declaring a divi of £150k per share would require £300k of company reserves though, whereas they way they done it, only £200k was required.

johngroganjga's picture

Waivers

johngroganjga |

JCresswellTax wrote:

Declaring a divi of £150k per share would require £300k of company reserves though, whereas they way they done it, only £200k was required.

Are you making the point that declaring a dividend that could not be paid (because of lack of distributable reserves) but for the fact that some of it had been waived is a problem?  I have heard of this point being taken but never seen it taken myself.  What problem does it give rise to when it is taken?

JCresswellTax's picture

Steve Kesby

JCresswellTax |

No, in this example they are not husband and wife.

Care to elaborate a little bit further?

BKD's picture

No such thing as a partial waiver

BKD |

The correct route to achieve the above result:

Dividend 1: £50k each

Dividend 2: £100k, with waiver

Perfectly legal, but dodgy from a tax perspective

johngroganjga's picture

Agreed

johngroganjga |

BKD wrote:

The correct route to achieve the above result:

Dividend 1: £50k each

Dividend 2: £100k, with waiver

Perfectly legal, but dodgy from a tax perspective

Agreed.  And share splitting before the next dividend payment to allow them to do it the right way.

Steve Kesby's picture

Spouses

Steve Kesby |

If they were married or in civil partnership, then they'd each be taxable on £100K despite their efforts.

If the waiver is in place prior to the dividend being proposed/declared by the directors thay can take account of it and declare a dividend of up to the available reserves on those shares in respect of which they haven't received waivers.

johngroganjga's picture

Really?

johngroganjga |

Steve Kesby wrote:

If they were married or in civil partnership, then they'd each be taxable on £100K despite their efforts.

Are you saying waivers are disregarded for tax purposes if all shares are held by spouses or civil partners?

Steve Kesby's picture

No

Steve Kesby |

johngroganjga wrote:

Steve Kesby wrote:

If they were married or in civil partnership, then they'd each be taxable on £100K despite their efforts.

Are you saying waivers are disregarded for tax purposes if all shares are held by spouses or civil partners?

I'm saying that a dividend waiver has been held in Buck to be a settlement of a right wholly to income and a similar finding was applied to alphabet shares in Patmore.

I think the solution is....

tonycourt |

Adding more detail on what Steve has said:

  • The company declares a dividend of £100,000 each shareholder gets £50,000
  • Shareholder A waives subsequent dividend
  • the company declares a dividend of £200,000 of which B is entitled to £100,000 and A gets nothing.

Although the company needs £300,000 reserves to achieve this it only uses £200,000 of these. The difference of £100,000 can be used to pay later dividends. 

johngroganjga's picture

Why?

johngroganjga |

tonycourt wrote:

Although the company needs £300,000 reserves to achieve this it only uses £200,000 of these.  

Why does company need £300,000 reserves to pay a £200,000 dividend?

Because.....

tonycourt |

Company law requires that a company has suffiicient distributal reserves to pay a dividend to each of the shareholders entitled to receive one. The fact that one shareholder waives their right does not reduce this requirement to the amount actually distributed.

This point was touched on in Buck v HMRC   

johngroganjga's picture

Consequences

johngroganjga |

tonycourt wrote:

Company law requires that a company has suffiicient distributable reserves to pay a dividend to each of the shareholders entitled to receive one. The fact that one shareholder waives their right does not reduce this requirement to the amount actually distributed.

This point was touched on in Buck v HMRC   

But what are the tax consequences when such a dividend is paid?

Steve Kesby's picture

There's a route to arguing...

Steve Kesby |

johngroganjga wrote:

tonycourt wrote:

Company law requires that a company has suffiicient distributable reserves to pay a dividend to each of the shareholders entitled to receive one. The fact that one shareholder waives their right does not reduce this requirement to the amount actually distributed.

This point was touched on in Buck v HMRC   

But what are the tax consequences when such a dividend is paid?

... that it's not a dividend at all, but a payment of earnings. Buck, Whyte v Franklin (42 TC 283), PA Holdings.

BKD's picture

I still disagree

BKD |

tonycourt wrote:

 The fact that one shareholder waives their right does not reduce this requirement to the amount actually distributed.

Yes it does - that is precisely the point of a waiver - it removes the entitlement to participate in the dividend. From a legal standpoint, the only restriction is that a company may not actually distribute more than it has to distribute. In this case, the company may have been legally entitled to pay the full £200k to shareholder A with an appropriate waiver from B.

And that is precisely the point made in Buck - the dividend would have been impossible (not was impossible) were it not for the waiver.

 

The tax analysis may of course be quite different.

Locutus's picture

I think the reason behind this is

Locutus |

johngroganjga wrote:

tonycourt wrote:

Although the company needs £300,000 reserves to achieve this it only uses £200,000 of these.  

Why does company need £300,000 reserves to pay a £200,000 dividend?

The end result was that shareholder 1 received £150k dividend and shareholder 2 received no dividend.  The easiest way of achieving this would obviously have been to declare a £300k dividend, but for shareholder 2 to waive their £150k dividend.

However, I suspect the company didn't have £300k in reserves to do this, hence the convoluted partial dividend / gifting waiver nonsense.

I vaguely remember hearing on a course that partial dividend waiver was not possible - you either get the dividend or you don't.  So in my view the partial dividend waiver / gift solution undertaken by the shareholders is invalid.

BKD's picture

Disagreed - sort of

BKD |

tonycourt wrote:

Adding more detail on what Steve has said:

  • The company declares a dividend of £100,000 each shareholder gets £50,000
  • Shareholder A waives subsequent dividend
  • the company declares a dividend of £200,000 of which B is entitled to £100,000 and A gets nothing.

Although the company needs £300,000 reserves to achieve this it only uses £200,000 of these. The difference of £100,000 can be used to pay later dividends. 

The company needs only £200,000 reserves to achieve that result. £300k would be required to avoid any tax nasties

JCresswellTax's picture

Thanks everyone

JCresswellTax |

:)

Paul Scholes's picture

Practical aspects

Paul Scholes |

I have always followed BKD's logic above.  It's the directors who pay or recommend a dividend and they already know who has waived and therefore what kitty is available.

BKD's picture

I'd like to take the credit, Paul ...

BKD |

... but it's not 'my' logic. It's a straightforward application of the legislation. I'm always bemused by how much discussion it generates.