A dividend waiver is a tool used by company shareholders to voluntarily relinquish their entitlement to a dividend payment, either for a single instance or a series of payments. This decision allows the shareholder to leave their share of the company’s profits in the business rather than taking it as personal income. Below, we explore how dividend waivers work, their purpose, and the procedure for implementing one.
Key Takeaways
A dividend waiver enables shareholders to forgo dividends, often for tax efficiency, personal circumstances, or business growth.
Waivers must be formalized through a deed before dividends are declared or paid.
The waived funds cannot be redistributed to other shareholders but must remain in the company.
How Do Dividend Waivers Work?
When a company earns a profit, it may distribute a portion of it as dividends to shareholders, calculated per share. However, shareholders may occasionally opt out of receiving a dividend. Reasons might include the desire to keep profits within the business or personal tax considerations.
A dividend waiver allows a shareholder to legally forgo their entitlement to a dividend without impacting the rights of other shareholders. Importantly, the company must have sufficient distributable profits to support paying dividends to all shareholders at the declared rate, even if some shareholders waive theirs. This ensures fairness and prevents HMRC (Her Majesty's Revenue and Customs) from challenging the waiver as an attempt to redistribute income for tax advantages.
Key Rule: Waived dividend amounts cannot be reallocated to other shareholders. They must remain in the company for reinvestment or other purposes.
Procedure for a Dividend Waiver
To enact a dividend waiver, the shareholder must execute a formal deed of waiver. This document declares their intent to waive their entitlement and ensures compliance with legal and tax regulations.
What to Include in a Dividend Waiver Deed:
Shareholder’s name and address.
Number and class of shares held.
The company’s name.
The scope of the waiver—whether it applies to a single dividend, dividends for a set period, or indefinitely.
Specific classes of shares covered (if applicable).
Reason for waiving the dividend.
Date of waiver.
Shareholder’s signature.
Witness details, including name, address, and signature.
Timing of Waiver Execution:
For final dividends, the waiver must be signed before the dividend is declared (typically at the Annual General Meeting, or AGM).
For interim dividends, the waiver must be signed before the payment date.
Directors should record the acceptance of the waiver in board meeting minutes and retain a copy of the deed as part of the company’s official records.
Who Can Witness a Dividend Waiver?
A witness must be:
At least 18 years old.
Physically present during the signing.
Unconnected to the shareholder, avoiding conflicts of interest (e.g., no family members, fellow shareholders, or directors).
Witnessing cannot be done via video calls, and the witness must sign the document in the shareholder’s presence.
Why Would a Shareholder Waive Their Dividends?
Dividend waivers provide flexibility and can support various goals, such as:
1. Business Growth
By leaving profits in the company, shareholders enable reinvestment in new equipment, product development, or other growth initiatives.
2. Tax Efficiency
High-income shareholders may waive dividends to avoid higher personal tax liabilities.
Avoid crossing tax thresholds, such as the higher-rate Income Tax bracket or the High Income Child Benefit Charge.
3. Inactive Shareholders
Founders or investors who no longer actively participate in the business may waive dividends temporarily or indefinitely.
4. Family Business Dynamics
In family-run businesses, retired family members may waive their dividends to allow younger relatives to draw income while leaving profits for future business needs.
Caution: HMRC Scrutiny
Dividend waivers must have a valid commercial purpose to avoid scrutiny from HMRC under anti-avoidance settlement legislation. HMRC could challenge waivers designed to divert income to lower-taxed individuals, treating the waived income as still belonging to the original shareholder.
Best Practices for Using Dividend Waivers
Use Sparingly: Frequent waivers may appear as tax avoidance. HMRC recommends waivers last no longer than 12 months.
Avoid Long-Term Waivers: Prolonged waivers can alter the relative value of shares, potentially creating legal and tax complications.
Consider Share Redesignation: For recurring or long-term needs, it may be better to create a separate class of shares without dividend rights.
A dividend waiver is a practical tool for shareholders to manage profits efficiently, whether for business growth or personal tax planning. However, proper execution, a clear commercial purpose, and adherence to HMRC guidelines are essential to avoid legal and financial complications. For frequent use, consult with a tax advisor to explore alternatives like share redesignation.
By using waivers strategically and responsibly, businesses can retain profits while maintaining compliance with tax laws, fostering growth, and supporting long-term objectives.
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