OWNER-managed businesses may need to review arrangements for shifting income from higher rate taxpaying shareholders to their lower rate taxpaying spouses if those arrangements involve dividend waivers in the wake of the recent decision of the Tax Chamber’s First-tier Tribunal.
The Tribunal 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 stop individuals (settlor) gaining a tax advantages by moving their income to another person who is liable to tax at a lower rate or is not liable to tax at all. Where this legislation applies to dividend waivers 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 the gift carries the right to the whole of the income arising from the property and the property is not wholly or substantially a right to income.
A dividend waiver may therefore constitute income shifting, to which the settlements legislation can apply most typically 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.