Dividends, share classes and dividend waivers
A dividend is money paid to a shareholder in return for their investment in a company. Dividends can be paid monthly, quarterly or annually as the directors of the company see fit. The only restriction is that the company must have profit available to pay out – management accounts are the best way to know whether that’s the case.
Dividends must be paid out in proportion to shares held, so if a company has 100 ordinary shares and declares a dividend of £10,000 each share will get £100. Someone holding 25 shares will therefore receive £2,500 and someone holding 75 shares will receive £7,500.
There are two ways this can be changed to enable dividends to be paid in other proportions:
1. Split the shares into different classes
A company can have different classes of shares, known as Alphabet Shares, which can have different rights attached to them. For example 100 shares could be split into 50 A Shares and 50 B Shares, with both classes having the right to dividends but only the B Shares having any voting rights.
Having different classes of shares enables the company to pay out a dividend on only one class. It is then possible to pay the A shareholders without paying the B shareholders for example.
2. A shareholder waives their right to receive a dividend
A shareholder can waive their right to receive a dividend, basically saying “No thanks”, and certain paperwork then just needs to be completed and kept on file.
Both of these options should be used with caution, as there is a danger of the Settlements Legislation being applied (the old Section 660a, as made infamous by the Arctic Systems case). HMRC guidance includes some factors they look for when considering if the legislation applies:
- Disproportionately large returns on capital investments.
- Differing classes of shares enabling dividends to be paid only to shareholders paying lower rates of tax.
- Dividends being waived so that higher dividends can be paid to shareholders paying lower rates of tax.
- Income being transferred from the person making most of the profits of a business to a friend or family member who pays tax at a lower rate.
If you are considering either of these options in order to pay different dividends to different shareholders you should talk to your contractor accountant for specific advice before going ahead.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.