A recent case before the Tax Tribunal reminds us that where the right to dividends is waived this can create a “settlement” for income tax purposes such that some or all of the dividend waived may be taxed on the person waiving his right to the dividend. Mr Donovan and Mr McLaren each owned 40% of the shares in their company, with their wives owning 10% each. In year ended 31 March 2010 as the result of waivers by the husbands dividends of about £33,000 were paid to all four shareholders. The judge agreed with HMRC that a proportion of the dividends paid to the wives should be taxed on their husbands and that the exemption for inter spouse transfers tested in the case of Jones v Garnett (Arctic Systems Ltd) did not apply. An important consideration here is whether or not there are sufficient reserves to pay the full amount of dividend on all shares. This is a complex area and we can advise you on the correct procedure to follow to prevent an HMRC attack.