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24 September 2011

Are dividends a good way to boost income?


My son and I are directors of a small financial services company and I am looking to increase his income through the payment of regular dividends. The ordinary shares of the company are held 40 per cent by me, 47 per cent my wife and 13 per cent by my son. We all draw salaries from the company and have received dividend payments over the past few years. What are the implications if my wife and I waive our entitlement to dividends to keep sufficient cash within the company? An alternative is to issue non-voting shares which carry a right to a share of the profits. Do these have to be issued in the same ratio as the ordinary voting shares?


Your situation is fairly common, since remuneration by dividend can be quite inflexible. As you say, one common way to solve this is for some shareholders to waive the payment of dividends on their shares.


This waiver must be effected before you and your wife become entitled to the dividend. If not, you will be treated for tax purposes as having received the dividend and then made a gift – with the result that you, not your son, will be taxed.


Generally, shareholders become entitled at the time the dividend is payable. Since there is no consideration for the waiver, it should be made as a deed. There are certain formalities required for this.

You also need to consider value-shifting rules for capital gains tax, since HM Revenue & Customs might view the dividend waiver as a settlement.


Again, the result will be that the dividend income would be taxed on you, rather than your son. A Waiver is also a gift for Inheritance Tax purposes, unless it is waived more than 12months before the right to the dividend accrues.


A separate class of shares may solve these problems. However, note that non-voting shares are not classed as ordinary share capital, which can have other tax implications.


Source: FT 24.09.2011


*Article for guidance only. Professional advice should be obtained to ensure that all circumstances are assessed in providing a complete answer.