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View the related Tax Guidance about Income splitting

Cash dividends

Cash dividendsIntroductionA dividend is a distribution of profit by a company to its shareholders.A dividend is not only a payment in cash. It can be the issue of new shares in exchange for forfeiting the right to a cash payment (a stock dividend). For more detail, see the Non-cash dividends guidance note.This guidance note deals with cash dividends from UK resident companies. For more on dividends from non-UK resident companies, see the Foreign dividends guidance note.The taxation of dividends is discussed in the Taxation of dividend income guidance note.Cash dividends from UK resident companiesCash dividends paid by UK companies on or after 6 April 2016 have no dividend tax credit attached, meaning the amount received is the amount which is taxable. The company should issue the shareholder with a dividend voucher showing the number of shares held by the shareholder, the dividend paid and the date of payment.The amount reported in box 4 of the main tax return is the total dividends received from UK resident companies in the tax year (ie the arising basis of assessment). Dividends are reported on box 5.3 of the short tax return, see the Short tax return guidance note.The taxation of dividends is discussed in the Taxation of dividend income guidance note.Note that where certain conditions are met, dividends from non-UK incorporated close companies may be treated for UK tax purposes as if they were UK dividends irrespective of the residence status of the company. See the Foreign dividends guidance note. UK cash

Income shifting

Income shiftingThis guidance note considers how the settlements legislation can apply to income shifting, particularly as regards a family company.Overview of the settlement provisionsA popular tax planning approach is to transfer income-producing assets between spouses or civil partners. This may be done where one pays income tax at a lower marginal rate than the other, or to ensure that personal allowances are used in full. Such arrangements are also known as ‘income splitting’ or ‘income shifting’. They have long been the subject of HMRC scrutiny.The scope for tax saving is potentially greater with the introduction of the additional tax rate from 6 April 2010.Inter-spousal / civil partner tax planning is assisted by the fact that for capital gains tax purposes, the transfer of income-producing assets should be a no-gain no-loss transfer. See the Inter-spouse transfer guidance note.One aspect which has come under the spotlight is that such transfers may constitute a settlement. The settlement rules, as discussed below, are complex but they can result in income being taxed on the donor despite the transfer (see below).The advantages of income splitting are discussed further in the Utilising allowances and lower rate bands guidance note. For in-depth discussion of settlements, see Simon’s Taxes I5.1108.Settlement provisionsThe settlement provisions were originally introduced to prevent the settlor of a trust gaining a tax advantage in situations where they (or their spouse / civil partner) could give away an asset, while still receiving some benefit from the trust. The rules mean that if a settlor