It can be done, but it is the arrangement HMRC challenges most often. If the waiver lets your spouse receive more than their shareholding would normally pay and they pay less tax than you, HMRC can tax the extra dividend on you under the settlements legislation. The exemption for gifts between spouses does not protect it, because nothing is gifted.
Why people ask
Dividends on the same class of share must be paid at the same rate per share. A husband and wife who own 50 shares each therefore take equal dividends. If one of them is a higher-rate taxpayer and the other has unused allowances, the obvious idea is for the higher-rate spouse to waive their dividend so that the other receives more.
What HMRC does with it
HMRC does not say every waiver fails. Its manual (TSEM4225) lists five factors that suggest the settlements legislation is likely to apply.
- The company's retained profits are too low to pay the same dividend on all the shares.
- A run of waivers over several years would, without the waivers, have paid out more than the accumulated profits.
- There is other evidence that the same rate would not have been paid on every share.
- The people who gain are those the waiving shareholder would naturally want to benefit.
- The shareholders who gain pay less tax on the dividend than the waiving shareholder would have done.
HMRC's own example
A wife holds 80 shares in a company and her husband holds 20. The company has made £25,000 of profit. The wife waives her dividend and the company declares £1,000 per share, so the husband, who has no other income, receives £20,000.
HMRC says the company could not have paid that on every share without the waiver, so the waiver enlarged the husband's dividend. It treats £16,000 of it as the wife's income. Nothing was transferred between them, so the exemption for gifts between spouses does not apply.
Safer routes
If you want your spouse to be taxed on a share of the company's profits, the cleaner route is an outright gift of ordinary shares, which the exemption protects. See our page on spousal dividends. If you need flexibility year to year, read about alphabet shares, which carry their own risks.
Leaving profits in the company, paying pension contributions from it or paying a real salary to a spouse who does real work all avoid the settlements rules altogether.
If you do use a waiver
- Make it by deed, before the dividend is declared, for one named dividend.
- Check the company could pay the full dividend on every share without the waiver, and record that.
- Avoid repeating it every year.
- Pay the other shareholder's dividend into their own bank account.
- Be aware that a waiver covering a long future period can raise an inheritance tax point, so they are normally made one dividend at a time.
Where the person is not a spouse
The settlements rules mainly bite on spouses, civil partners and unmarried minor children. An unmarried couple who both own shares, or an adult child, are less exposed. The rules can still apply if the money comes back to the person who waived or is used for their benefit, and a share structure still needs a commercial reason.
Sources: HMRC manual TSEM4225: dividend waivers · HMRC manual TSEM4205: outright gifts between spouses
Frequently asked questions
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