Introduction: Why a Dividend Waiver Is Riskier for American Shareholders
A dividend waiver is a formal promise by a shareholder to give up a dividend they would otherwise receive, so that the other shareholders take a larger share of the payout. Family companies use them constantly. Typically, the higher-earning spouse waives, and the lower-earning spouse receives the dividend at a lower tax rate. HMRC has challenged this pattern for decades. However, when the waiving shareholder is an American, a second tax system joins the argument, and the two countries can reach opposite conclusions about the same payment.
What a Dividend Waiver Is and Why Family Companies Use One
Under UK company law, every share of the same class normally carries the same right to dividends. A dividend waiver breaks that symmetry for a specific payment or period. For example, a director who holds 90 shares may waive, so that a spouse with 10 shares receives the entire dividend. The company pays less in total, while the family receives the cash in the lower tax band. Consequently, a single deed can save a household many thousands of pounds each year, provided HMRC accepts it.
Why the American Angle Changes Everything
For an American, the stakes run in both directions. On the UK side, HMRC can use the income-shifting rules in the Income Tax (Trading and Other Income) Act 2005 to tax the waived dividend on the person who waived it. On the US side, the IRS can apply its own doctrines, which do not follow HMRC's analysis. Moreover, the company itself is usually a controlled foreign corporation, with Form 5471 and FBAR reporting attached. At TaxYork, we prepare both returns for owner-managers, and a poorly documented dividend waiver is one of the most common problems we find when an American founder's UK and US filings are finally compared.
Who This Guide Is For
This guide is written for American citizens and green card holders who own shares in UK family companies. It also covers dual nationals, accidental Americans and British founders married to Americans. In particular, it helps readers who have used a dividend waiver in past years and now need to know whether missed UK tax returns, missed US tax returns or missed reporting follow from it.
How a Valid Dividend Waiver Works Under UK Company Law
Before any tax question arises, the waiver must be legally effective. If it fails under company law, the waived dividend still belongs to the shareholder who tried to waive it. Therefore, the mechanics come first.
The Deed and Its Formalities
A dividend waiver is almost always made by deed. The reason is simple. A promise to give up money without receiving anything in return is not binding as a contract, so it needs the formality of a deed. The shareholder signs it, a witness attests it, and the company receives it before the relevant date. Additionally, the company should keep it with its statutory records. In our experience, missing witnesses and undated deeds are the two defects HMRC finds most often.
Timing: Interim Versus Final Dividends
Timing decides whether the waiver works at all. An interim dividend, declared by the directors, becomes a debt only when it is paid. Accordingly, a dividend waiver of an interim dividend must be in place before payment. A final dividend, declared by the shareholders in general meeting, becomes a debt as soon as it is declared, unless it names a later payment date. Therefore, a waiver of a final dividend must precede the declaration. A deed signed after the right arises does not waive anything. Instead, it gives away money that already belonged to you.
Distributable Reserves and Unlawful Dividends
Under section 830 of the Companies Act 2006, a company may only pay dividends out of profits available for distribution. If it pays too much, section 847 makes a shareholder who knew, or had reasonable grounds to believe, that the payment was unlawful liable to repay it. This matters for waivers, because a waiver often lets a small company pay a high rate per share that it could never afford across every share. Consequently, reserves are both a company law test and, as we explain below, the first thing HMRC checks.
How Long a Waiver Lasts
A deed can cover a single dividend, every dividend in one financial year, or dividends indefinitely. Nevertheless, a long-running dividend waiver attracts more scrutiny, because a pattern of waivers over several years is one of HMRC's published warning signs. We therefore recommend a fresh, specific deed for each dividend, supported by board minutes that record the commercial reason.
HMRC's Settlements Challenge to a Dividend Waiver
The main UK risk comes from the settlements legislation in Part 5, Chapter 5 of the Income Tax (Trading and Other Income) Act 2005. Despite its old-fashioned name, it is not limited to formal settlements. It targets any bounteous arrangement that moves income to someone else, typically a spouse, while the person who arranged it keeps an interest.
The Arrangement Test and the Spouse Rule
Section 620 of ITTOIA 2005 defines a settlement to include "any disposition, trust, covenant, agreement, arrangement or transfer of assets". A dividend waiver that benefits a family member can fall squarely within "arrangement". Section 624 then taxes the income on the settlor where the settlor retains an interest. Importantly, section 625 treats property as retained if it is payable to, or applicable for the benefit of, the settlor's spouse or civil partner. As a result, a waiver in favour of your spouse can leave you taxed on your spouse's dividend.
Why the Spouse Exemption Rarely Saves a Waiver
Section 626 exempts an outright transfer of property between spouses, but only if the property is not "wholly or substantially a right to income". A waived dividend is nothing but a right to income. Therefore, the exemption does not help. That was the decisive point in Buck v HMRC in 2009. Mr Buck held 9,999 shares, his wife held one, and he waived so that she received a dividend of £35,000 on her single share. Paying the same rate on all 10,000 shares would have required roughly £350 million of reserves. The tribunal found a settlement, and Mr Buck was taxed on his wife's dividends.
HMRC's Five Warning Signs in TSEM4225
HMRC publishes its approach in TSEM4225 of its settlements manual. It lists five factors. First, retained profits are too low to pay the same rate on all issued shares. Second, there has been a succession of waivers whose total would exceed accumulated realised profits. Third, other evidence suggests the same rate would not have been paid without the waiver. Fourth, the non-waiving shareholders are people the waiving shareholder can reasonably be regarded as wishing to benefit. Finally, the non-waiving shareholder pays less tax on the dividend than the waiving shareholder would have. In a typical husband-and-wife company, the last two factors are almost always present, so the reserves tests carry the whole defence. TSEM4220 confirms that HMRC applies this analysis to close companies.
Donovan and McLaren: Waivers Across Several Years
In Donovan and McLaren v HMRC in 2014, two directors each held 40% of a company, and their wives each held 10%. The directors waived for a single day, and an interim dividend then went only to the wives. Over several years, the company could not have paid the same rate on every share out of its accumulated profits. The tribunal again found a settlement, and each director faced roughly £27,000 of additional tax. Accordingly, even a one-day waiver fails if the reserves arithmetic does not work across the whole period.
Waivers That Benefit Minor Children
If a dividend waiver increases dividends on shares held by your unmarried minor children, section 629 of ITTOIA 2005 taxes that income on you as the parent, subject to a small £100 de minimis. There is no reserves defence here. Consequently, a waiver in favour of children's shares almost never achieves a UK saving.
The New Tax Return Boxes Make Every Dividend Waiver Visible
Until recently, HMRC often discovered waivers only through an enquiry. From the 2025/26 tax year, however, the UK tax return itself exposes them.
What Boxes 7.3 and 7.4 Reveal
Every director of a close company must now report, on the SA102 employment pages, the dividends received from that company in box 7.3 and the highest percentage shareholding held during the year in box 7.4. HMRC's 2026 SA102 notes require a zero rather than a blank. So a director who waives now files a return showing, for example, a 90% shareholding and £0 of dividends. That combination is exactly what a risk-scoring system is designed to find. Our guide to the close company director boxes explains the new rules in full.
Companies House Records Win Arguments
Tribunals give great weight to the company's own records. In Bucknell v HMRC, decided in January 2026, a sole shareholder argued that a colleague had owned half the company for several years. The tribunal rejected the claim because Companies House records showed no change, and it upheld assessments on undeclared dividends. The lesson for a dividend waiver is direct. If the deed, the board minutes and the dividend vouchers do not exist, or they post-date the payment, HMRC will treat the dividend as yours.
What Happens When HMRC Succeeds
If the settlements legislation applies, HMRC assesses the waiving shareholder on the dividend, plus late payment interest. Where the error is careless, it can add an inaccuracy penalty. Meanwhile, the spouse who reported and paid tax on the same dividend must claim a repayment, and the timing rarely lines up neatly. Additionally, if the waiver was used for several years, HMRC can reach back four years for innocent errors and six years for careless ones.
The US Side of a Dividend Waiver
American shareholders often assume that the US simply follows the UK result. It does not. The IRS applies its own rules about who earned the income, and those rules can produce a mismatch that no tax treaty resolves.
Who the IRS Treats as Receiving the Dividend
US tax law generally taxes income to the person who owns the property that produces it. In Helvering v. Horst, the US Supreme Court held that a father who handed interest coupons to his son was still taxable on the interest. A properly timed dividend waiver, made before any right to the dividend arises, is stronger than the Horst facts, because the waiving shareholder never had a right to the payment. Nevertheless, where a controlling shareholder repeatedly directs dividends to family members, the IRS can argue that the shareholder controlled the income and should be taxed on it. In practice, the US result depends heavily on the same documents HMRC looks at.
A Waiver in Favour of a Non-American Spouse
The most common structure we see is an American director waiving so that a British spouse receives the dividends. If the spouse is a nonresident alien and the couple files separately, the spouse's UK dividends sit outside the US tax net. That can remove the 3.8% net investment income tax as well as ordinary US tax. However, if the couple has made an election under section 6013(g) of the Internal Revenue Code to file jointly, the spouse's worldwide income becomes taxable in the US, and the US benefit of the waiver disappears. Our guide to the section 6013(g) election for a British spouse explains the trade-off.
Controlled Foreign Corporation Rules Ignore the Waiver
If US shareholders own more than 50% of the company, it is a controlled foreign corporation. Its profits can then be taxed to US shareholders each year, whether or not dividends are paid. Under Treasury Regulation 1.951-1(e), each shareholder's pro rata share is based on a hypothetical distribution of all the company's earnings, taking into account the terms of each class of stock and any agreement among the shareholders. Furthermore, an anti-avoidance rule disregards arrangements whose principal purpose is to shift earnings. Consequently, a dividend waiver does not reduce an American's share of any NCTI or Subpart F inclusion. In most UK trading companies, a high-tax election removes those inclusions because corporation tax runs at 25%. However, where the election is unavailable, the waiver leaves the US inclusion untouched.
The Foreign Tax Credit Mismatch
The most expensive outcome arises when HMRC wins and the IRS does not follow. HMRC then taxes the American on a dividend that, for US purposes, belongs to the spouse. The American pays real UK tax but reports no matching dividend on the US return. As a result, the UK tax has no US income to offset in the same Form 1116 category, and much of it becomes an excess credit. That credit can be carried back one year and forward ten, but many owners never generate enough foreign income to use it. Our US-UK treaty and foreign tax credit service models this before a waiver is signed, not afterwards.
Form 5471 and FBAR Still Apply
A dividend waiver changes nothing about US reporting. An American who owns 10% or more of the company still files Form 5471, and a majority owner still reports the company's UK bank accounts on the FBAR through FinCEN's BSA E-Filing system. In our experience, founders who used waivers to keep dividends off their US return often skipped these forms too, on the mistaken view that no US income meant no US filing. That is how a UK planning step becomes a missed FBAR and missed reporting problem. Our FBAR and FATCA service covers both personal and company accounts.
Safer Alternatives to a Dividend Waiver
Because HMRC and the IRS both look at substance, the most reliable answer is often to avoid a dividend waiver altogether and build the income split into the share structure.
A Separate Class of Shares
Many family companies now issue different classes of shares, often called alphabet shares, so that the directors can declare different dividends on each class. In Jones v Garnett in 2007, the House of Lords held that the spouse exemption protected ordinary shares transferred outright to a spouse, because those shares carried voting and capital rights, not merely a right to income. However, shares that carry only dividend rights fail the same test. For an American, a new share class also changes the vote and value analysis on Form 5471. Therefore, the structure needs designing on both sides of the Atlantic at once.
Paying a Spouse for Real Work
If your spouse works in the business, a salary for genuine duties is deductible for corporation tax and does not rely on the settlements rules at all. It must be commercially justifiable for the work performed. Although salary carries National Insurance, it avoids the reserves arithmetic that undermines most waivers.
Taking the Dividend and Relying on the Foreign Tax Credit
For many Americans in higher-rate bands, the simplest option is to take the dividend. UK dividend tax from 6 April 2026 runs at 10.75%, 35.75% and 39.35% after a £500 allowance, as gov.uk's dividend tax page confirms. UK dividends from a treaty-eligible company usually qualify for the reduced US rate, and the UK tax generally exceeds the US tax on them. Consequently, the main residual US cost is often the net investment income tax. Our guide to US tax on UK dividends for dual filers walks through the arithmetic.
Correcting Past Waivers and Missed Returns
If earlier waivers were poorly documented, act before HMRC does. An unprompted disclosure attracts much lower penalties than a prompted one. On the US side, an American who has missed US tax returns, FBARs or Forms 5471 through non-wilful conduct can often use the IRS Streamlined Filing Compliance Procedures, which cover three years of returns and six years of FBARs. Our IRS Streamlined filing service assesses eligibility alongside the UK position.
Case Study: A London Founder's Dividend Waiver
The following example is illustrative, but it reflects the situations we see. Tom is a US citizen who has lived in London for nine years. He owns 90 of the 100 ordinary shares in a software consultancy, and his British wife, Claire, owns the other 10. Claire has no other income. The company has distributable reserves of £400,000, and Tom takes a salary of £60,000.
The Waiver and Its UK Result
In 2026/27, Tom signs a dividend waiver by deed before the board pays an interim dividend of £10,000 per share. Claire therefore receives £100,000, and Tom receives nothing. Her personal allowance covers the first £12,570, £500 falls within the dividend allowance, £37,200 is taxed at 10.75% and £49,730 at 35.75%. Her UK tax is about £21,777.
However, paying £10,000 on all 100 shares would have required £1,000,000, and the company holds only £400,000. That is the first TSEM4225 warning sign, and the others follow automatically. If HMRC applies the settlements legislation, Tom is taxed on the £100,000 instead. His income rises to £160,000, so he loses his personal allowance, which adds about £5,028 of tax on his salary. His dividend tax is about £36,826. In total, the UK cost rises from £21,777 to roughly £41,854, a difference of over £20,000 before interest and penalties.
The US Result
For US purposes, Tom files separately from Claire, who is a nonresident alien. The dividend was legally paid to Claire, so on these facts it does not appear on Tom's Form 1040. If HMRC taxes Tom on it, however, he pays about £41,854 of UK tax on income the IRS does not attribute to him. Because Tom has little other foreign income in the same category, most of that tax becomes an excess foreign tax credit he is unlikely to use. Meanwhile, Tom owns 90% of a controlled foreign corporation, so he needs Form 5471 every year and must report the company's two UK bank accounts on his FBAR. He had filed neither.
The Outcome
We advised Tom to stop using waivers. Instead, Claire subscribed at market value for a new class of ordinary shares carrying full voting and capital rights, using her own savings, and the board now declares dividends on each class separately. We also prepared three years of amended US returns with Forms 5471 and six years of corrected FBARs under the Streamlined Foreign Offshore Procedures. As a result, Tom removed the settlements risk for future years, avoided potential Form 5471 penalties of at least $30,000, and aligned his UK and US filings.
How TaxYork Can Help
TaxYork prepares US and UK tax returns together for company owners, founders and investment professionals with cross-border lives. For a family company, that means reviewing every dividend waiver against the reserves tests, checking the deeds and minutes, and completing the new SA102 close company boxes correctly. Furthermore, we prepare Forms 5471, 1116 and 8938, file FBARs for personal and company accounts, and model the foreign tax credit before you choose a structure. Our guide for US citizens who are UK company directors and our cross-border planning service show how we coordinate both systems.
Conclusion
A dividend waiver looks like a simple family tax saving. In practice, it rests on strict company law formalities, a reserves test HMRC applies with hindsight, and a spouse exemption that does not protect it. For an American shareholder, the IRS adds its own view of who earned the income, ignores the waiver for controlled foreign corporation purposes, and can leave UK tax stranded as an unusable credit. Therefore, review any waiver before you sign it, document it properly if you proceed, and consider a share structure that achieves the same result without the risk. Most importantly, make sure the Form 5471 and FBAR filings that the company creates are already on file.
Contact Us
If you own shares in a UK family company and hold US citizenship, a green card or dual nationality, our team can review your dividend arrangements on both sides of the Atlantic. Book a consultation today, email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article provides general information about dividend waivers and US-UK cross-border taxation. It does not constitute tax, legal or financial advice, and it does not create a professional relationship. The case study is illustrative, and its names, figures and outcomes are invented to demonstrate how the rules apply. Tax law changes frequently, and your position depends on your own facts. You should obtain professional advice before acting on any matter discussed here. Written by the TaxYork Expert Team — US-UK tax specialists.