Claifcations regd shareholder pattern change

[balasundaramk]

Hi All,

Need your guidance.

I am an IT consultant. I started a company in Aug 2013. I owned 100% of the shares. I started trading in Nov 2013. In April 2014, I transferred 50% of the shares to my wife (who was a student then) as she was thinking of starting a business on her own shortly and we thought we could do it under the same company. But her plans to start business changed after her studies finished and she got a job offer. He has got a good job offer now and is planning to work for a few years. As she is not going to be part of the company, she is planning to return her 50% shares back to me.Also,because she is receiving a good salary now, she will be liable to pay more tax on the dividends she will receive from my company. But I read that there might be issues if she returns her 50% shares to me.. My accountant says that HMRC may try and argue the shares that are being transferred are indeed a right to income because there is the expectation to receive the dividends if the underlying reasoning behind the transfer is to reduce one or both tax payers liabilities. And he is asking me to get the shares back only when I am confident of giving a justification to HMRC if there is an enquiry.

1. Do you think if my wife gifts her shares back to me, will there be any issues?

2. Assuming If HMRC is making an issue in the future say 2017, will I be asked to pay extra tax on the dividends my wife received in 2014 or will my wife be asked to make extra tax on the dividends I pay myself between today (assuming she gave me back 50% of the shares today) and 2017?

3. Instead of my wife gifting the shares to me, can I formally buy the shares from her and pay some tax?

4. I was thinking that I will start trading a new company to minimize the liabilities to the funds currently left in the company account. My current contract with my client expires in 3 months. Can I start trading with my existing client now under the new company or does it cause any issues? Is it atleast OK to start my new contract with a new client with a new company? Do you see any issues?


Many thanks in advance for your help and guidance.

Regards
Bala.

[balasundaramk]

Can any experienced members kindly help?

Any help/pointers will be greatly appreciated.

Many thanks,
Bala.

[stek]

Claifcations regd shareholder pattern change

What does your accountant say?

[balasundaramk]

What does your accountant say?

Thanks a lot for the interest.

My accountant is giving a generic answer. He is saying that if I am confident of convincing the HMRC that my wife is gifting the shares back to me because she is no longer interested in using the same company to start her venture then my wife can gift the shares back to me. In other words, If I am able to prove to HMRC that the sole reason why my wife is returning the shares to me is because she is not interested in the ownership of the business (and not to decrease her tax), then my wife can gift the shares back to me. Otherwise, we just stick to the current shareholder pattern. He is not able to give a firm recommendation because he is saying that spouse returning the shares back is not tested in courts previously, anything can happen and he wants me to take a decision based on my risk appetite.

He is not sure of the items 2, 3 and 4 in my original post.

He is making me think that I need a new accountant.

Thanks,
Bala

[TheFaQQer]

1. Do you think if my wife gifts her shares back to me, will there be any issues?

No.

2. Assuming If HMRC is making an issue in the future say 2017, will I be asked to pay extra tax on the dividends my wife received in 2014 or will my wife be asked to make extra tax on the dividends I pay myself between today (assuming she gave me back 50% of the shares today) and 2017?

It would be back dated for up to six years.

3. Instead of my wife gifting the shares to me, can I formally buy the shares from her and pay some tax?

You could buy them back - you'd need an accurate valuation of the company and then pay for them. She would then probably have to pay CGT on the gain she made.

4. I was thinking that I will start trading a new company to minimize the liabilities to the funds currently left in the company account. My current contract with my client expires in 3 months. Can I start trading with my existing client now under the new company or does it cause any issues? Is it atleast OK to start my new contract with a new client with a new company? Do you see any issues?

You'll need to pay to close the company down, and you wouldn't be able to get any entrepreneur's relief on the sale because you are still continuing doing the same thing. You'd need to terminate the existing contract with the agency / client and then form a new one with your new company name.

[northernladuk]

To be honest the whole post just reeks of tax fudging. Changing your share ownership regularly is a red flag to HMRC for just this reason. You have no business interest in the shares, just to maximise tax advantages. The 'might start a business' up won't wash and best advice is to run two separate companies for this very reason.

As this is a potentially risky area I would suggest you go ask a specialist that knows exactly what they are doing. An accountant that can't answer 2,3 and 4 are about as much use as a chocolate fireguard. Sounds more like a book keeper than an accountant. That said, using your wife as a tax mule is something that only one man businesses tend to do so might not be too surprising many accountants have had much experience of it. Not to know is a bit inexcusable though surely.

There are a lot of 'I's in item two. Might be worth thinking in terms of 'my business' and 'me' to understand who has to pay what.

On the shutting your business down, there are rules about swapping business to gain tax advantages. It's called Pheonixing and it's frowned up so don't do it. Shut it down when there is a nice long gap or a business need.

It strikes me your approach to your business is pretty poor, always looking to break some rules or look for tax advantages that are not really there. IMO start acting like a business rather than someone that is just trying to evade tax. A good rule of thumb is that if you need to do something because there is a genuine business need then its OK. If you make a change that isn't required just to gain tax it's going to be frowned up.

[TheCyclingProgrammer]

Arctic established that a transfer of ordinary shares was not solely a gift of income and therefore not caught by the settlements legislation due to the spouse exemption applying.

On that basis, I don't think there's inherently wrong with her transferring the shares back to you again.

The risk lies, IMO, of HMRC challenging the original gift to your wife. It's not enough that the shares are ordinary shares; it has to be an "outright gift", i.e. that you no longer personally retain an interest in the gifted shares and that the gift was made with no conditions attached.

That may have been the actual case and your wife is quite entitled to do as she pleases with her shares, including gifting them back to you. But HMRC could make the argument that the shares were originally gifted "with strings attached", i.e. that there was always some intention of the shares coming back to you.

Of course, they would have to prove that. I'm not sure where the burden of proof would lie. But if they could show it was not an outright gift, they would then seek to have your wife's dividends taxed as your own.

This is all hypothetical and in practice, I'm not sure you will have a problem.

I don't think you would have any issues shutting down your company and starting again with a new one, but as you will be continuing to trade you wont be eligible for entrepneurs relief - depending on your company's reserves that might not matter.

[balasundaramk]

Thanks a lot for your valuable inputs, FAQqer, NorthernLad and TheCyclingProgrammer. Really helpful