Think Before You ‘Waive’ Goodbye To Dividends Mar 14 · certain members to waive their rights...
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Disclaimer: This note is intended for general guidance only and it is important to consider the effect of the provisions with reference to the facts of each particular case. Whilst every effort has been made to ensure that the information contained in this briefing is correct it is intended as a guide only and should not be relied upon when embarking on any legal exercises. Specialist legal advice should always be sought so that all the factors specific to your circumstances can be taken into account. www.rooksrider.co.uk BRIEFING NOTE March 2014 Dividends are the most common means of extracting value out of a business in the form of income. Controlling and directing the payment of income is a common issue for owner managed businesses and family investment companies. Dividends from UK companies are subject to Income Tax pursuant to s.383 ITTOIA 2005. UK resident taxpayers liable to Income Tax at the basic rate are taxed at the dividend ordinary rate of 10% whilst UK resident taxpayers liable to Income Tax at the higher rate are taxed at the dividend upper rate of 32.5%. Depending on circumstances and the relationships between the members it may be preferable for certain members to waive their rights to dividends in favour of others. For instance, a husband who is a top rate taxpayer may wish to forego his dividend in favour of his wife as she may have a lower Income Tax liability. Similarly, it is often the case that family investment companies may have a mix of shareholders who are both UK resident and non UK resident individuals. In these circumstances, it may be preferable that UK resident shareholders waive their income payments in favour of non resident members. The practice of waiving dividends has recently come under review following a challenge by HMRC. Settlements The first tier tribunal in Donovan & McLaren v. HMRC (2014) UKFTT048 (TC) has recently held that a dividend waiver made in favour of the wife of a shareholder was a deemed settlement for the purposes of s.625 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). The settlement legislation is designed to prevent individuals from gaining an advantage by making arrangements to divert income to another individual who is liable to tax at a lower rate or not at all. Where settlements legislation applies to a dividend waiver, all the income waived is treated as that of the settlor. Pursuant to s.625 ITTOIA 2005 the settlement rules apply when the income will be, or may become, payable to or for the benefit of the settlor or their spouse or civil partner. Generally, there is an exemption for outright gifts to spouses, however in order for this exemption to apply the gift must carry the right to the whole of the income arising from the property and the property is not wholly or substantially a right to income (s.626 ITTOIA 2005). Furthermore, these provisions will also apply if the income is paid to a minor child (including stepchild) of the settlor (s.629 ITTOIA 2005). Following the decision of Donovan & McLaren, HMRC takes the view that settlement legislation will apply to dividend waivers if any of the following facts apply: • There is insufficient retained profits to allow an equal rate of dividend to be paid on all issued share capital; Think Before You ‘Waive’ Goodbye To Dividends
Transcript of Think Before You ‘Waive’ Goodbye To Dividends Mar 14 · certain members to waive their rights...
Disclaimer: This note is intended for general guidance only and it is important to consider the effect of the provisions with reference to the facts
of each particular case. Whilst every effort has been made to ensure that the information contained in this briefing is correct it is intended as a guide only and should not be relied upon when embarking on any legal exercises. Specialist legal advice should
always be sought so that all the factors specific to your circumstances can be taken into account.
www.rooksrider.co.uk
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BRIEFING NOTE
March 2014
Dividends are the most common means of extracting value out of a business in the form of income. Controlling and directing the payment of income is a common issue for owner managed businesses and family investment companies. Dividends from UK companies are subject to Income Tax pursuant to s.383 ITTOIA 2005. UK resident taxpayers liable to Income Tax at the basic rate are taxed at the dividend ordinary rate of 10% whilst UK resident taxpayers liable to Income Tax at the higher rate are taxed at the dividend upper rate of 32.5%.
Depending on circumstances and the relationships between the members it may be preferable for certain members to waive their rights to dividends in favour of others. For instance, a husband who is a top rate taxpayer may wish to forego his dividend in favour of his wife as she may have a lower Income Tax liability. Similarly, it is often the case that family investment companies may have a mix of shareholders who are both UK resident and non UK resident individuals. In these circumstances, it may be preferable that UK resident shareholders waive their income payments in favour of non resident members. The practice of waiving dividends has recently come under review following a challenge by HMRC.
Settlements
The first tier tribunal in Donovan & McLaren v. HMRC (2014) UKFTT048 (TC) has recently held that a dividend waiver made in favour of the wife of a shareholder was a deemed settlement for the purposes of s.625 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005). The settlement legislation is designed to prevent individuals from gaining an advantage by making arrangements to divert income to another individual who is liable to tax at a lower rate or not at all. Where settlements legislation applies to a dividend waiver, all the income waived is treated as that of the settlor. Pursuant to s.625 ITTOIA 2005 the settlement rules apply when the income will be, or may become, payable to or for the benefit of the settlor or their spouse or civil partner.
Generally, there is an exemption for outright gifts to spouses, however in order for this exemption to apply the gift must carry the right to the whole of the income arising from the property and the property is not wholly or substantially a right to income (s.626 ITTOIA 2005). Furthermore, these provisions will also apply if the income is paid to a minor child (including stepchild) of the settlor (s.629 ITTOIA 2005). Following the decision of Donovan & McLaren, HMRC takes the view that settlement legislation will apply to dividend waivers if any of the following facts apply:
• There is insufficient retained profits to allow an equal rate of dividend to be paid on all issued share capital;
Think Before You ‘Waive’ Goodbye To Dividends
Disclaimer: This note is intended for general guidance only and it is important to consider the effect of the provisions with reference to the facts
of each particular case. Whilst every effort has been made to ensure that the information contained in this briefing is correct it is intended as a guide only and should not be relied upon when embarking on any legal exercises. Specialist legal advice should
always be sought so that all the factors specific to your circumstances can be taken into account.
www.rooksrider.co.uk
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• There are sufficient retained profits for an equal rate of dividend, however this has only come about as a consequence of a series of waivers during previous years;
• There is any other evidence that might suggest that the same rate has been paid on all of the issued shares in the absence of the waiver;
• The recipient shareholders are persons who the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver e.g. spouse, children;
• Finally, the non waiving shareholder will pay less tax on the dividend than the waiving shareholder.
Inheritance Tax
Dividend waivers should not be assessable to IHT provided that the waiver is not intended to confer any gratuitous benefit on any person and is either made in a transaction on arm’s length terms between unconnected parties (s. 270 IHTA 1984) or is such as might be expected to be made in a transaction at arm’s length between persons not connected with each other (s.10 IHTA 1984).
The waiver must be made within 12 months before the right to the dividend arises (s.15 IHTA 1984). This should be borne in mind if you are considering waiving a dividend for a period that extends more than 12 months ahead.
Summary
Following this recent judgment it is clear that the waiving of dividends as a means of tax planning must be considered in detail before any decision is made. The risk of creating a settlement could lead to unwanted tax consequences for the parties concerned and we therefore recommend that advice is sought before a dividend is declared.
At Rooks Rider we have an experienced team who are able to advise you on your tax and corporate matters.
Disclaimer: This note is intended for general guidance only and it is important to consider the effect of the provisions with reference to the facts
of each particular case. Whilst every effort has been made to ensure that the information contained in this briefing is correct it is intended as a guide only and should not be relied upon when embarking on any legal exercises. Specialist legal advice should
always be sought so that all the factors specific to your circumstances can be taken into account.
www.rooksrider.co.uk
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For further information or to discuss any of the issues raised in this briefing note, please contact a member of the Rooks Rider Solicitors team:
Karen Methold Partner Head of Wealth Planning +44 (0)20 7689 7112 [email protected]
Nicholas Jenkins Managing Partner Wealth Planning +44 (0)20 7689 7161 [email protected]
Christopher Cooke Senior Partner Corporate & Wealth Planning +44 (0)20 7689 7110 [email protected]
Robert Drysdale Associate Wealth Planning +44 (0)20 7689 7168 [email protected]
Jeremy Duffy Solicitor Wealth Planning +44 (0)20 7689 7185 [email protected]
Rooks Rider Solicitors LLP Challoner House
19 Clerkenwell Close � London � EC1R 0RR
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