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Owner-managers with arrangements to shift income from themselves as higher rate tax payers to their spouse in a lower tax band may need to review those arrangements if they involve a dividend waiver by the higher rate tax payer.
A recent First-tier Tribunal (Tax Chamber) decision held that dividend waivers made in favour of shareholders’ wives were settlements and did not fall within the outright gifts to spouse exception.
Settlements legislation is intended to prevent an individual (settlor) from gaining a tax advantage by making arrangements that divert his income to another person who is liable to tax at a lower rate or is not liable to tax. Where the settlements legislation applies to a dividend waiver, all of the income waived is treated as that of the settlor.
There is an exemption for outright gifts to spouses, but the exemption only applies if both of the following apply:
A dividend waiver may constitute income shifting, to which the settlements legislation may apply. HMRC takes the view that the settlements legislation is likely to apply to dividend waivers if any of the following applies:
Most typically, the legislation applies to husband and wife companies where one spouse (a higher rate taxpayer) waives a dividend and the other spouse (not a higher rate taxpayer) receives a substantial dividend as a result.