The ordinary share capital of Victory Fire Ltd was owned by two married couples; the husbands owning 40% each and the wives 10%. The husbands regularly waived their entitlement to dividends leaving a situation where only the wives were receiving the distributions. By virtue of the waivers, the husbands’ taxable income was reduced.

Dividend waivers are legal given correct implementation. It is important that the company has sufficient profits to pay all shareholders even if some shareholders waive their entitlement. It is not acceptable for a shareholder to waive their dividend in order to provide a fellow shareholder with a larger dividend than would have been available for payment if the waiver was not made.

A gift of income?

As a result of the husbands’ waivers, the wives received extra dividends due to the increased profit reserve. HMRC considered this transaction to be a ‘gift of income’ and, due to the connection between the parties involved, was caught by special anti-avoidance legislation.