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HMRC internal manual

Trusts, Settlements and Estates Manual

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HM Revenue & Customs
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Settlements legislation: dividend waiver: when settlements legislation may apply

Not all dividend waivers are vulnerable to challenge. Where a company with few shareholders declares a dividend when one or more of the shareholders has waived their right to a dividend in circumstances where other shareholders may benefit, it is possible the settlements legislation could apply. You should look out for the following factors, which would indicate that the settlements legislation is likely to apply.

  • 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.

Where you have a case showing any of the above factors, submit it to HMRC Trusts & Estates Technical Edinburgh for advice. (See also CTM15270. External customers can see this guidance at http://www.hmrc.gov.uk/manuals/ctmanual/CTM15270.htm.

Example 12 - dividend waivers

Mrs H owns 80 ordinary shares in H Limited. Mr H owns 20 shares. In 2000, the company made a profit of £25,000. Mrs H waived her right to any dividend. The company then declared a dividend of £1,000 per share, and Mr H, who had no other income, received a dividend of £20,000.

No property has been transferred so the settlement is one of income. As such, the exemption for outright gifts to spouses is not in point and we would apply the settlements legislation in these circumstances. Clearly a dividend of this amount could not have been paid from the company’s profits on all the shares, so the waiver arrangement enhanced the dividend paid to Mr H. £16,000 of the dividend paid to Mr H is attributed to Mrs H under ITTOIA/S624 because the waiver was a bounteous arrangement.

Example 13 - dividends on certain shares

As in example 1, but in this case Mrs I owns A shares and Mr I owns B shares. Both A and B shares rank equally. Again profits of £25,000 are made and a dividend of £20,000 is voted on the B shares while no dividend is voted on the A shares.

Clearly by not voting dividends on the A shares (which rank equally with the B shares) this is a bounteous arrangement as the dividend paid on the B shares could only be paid if no dividend was declared in respect of the A shares. £16,000 of the dividend paid to Mr I is attributed to Mrs I under ITTOIA/S624 because the decision only to vote dividends on certain shares was a bounteous arrangement.