Shoving some dividends into the missus

[Lance]

It's not in the same way at all - dividend waivers have been dealt with in case law and have been shown to be something that you should be incredibly wary of using.

One of the key things in Arctic was that the shares had the same rights, and so that gives a good indication of how preference shares might be dealt with. AFAIK, no case has been brought or settled about preference shares, but I would be wary of preference shares because of the clear difference between preference shares and those that were used in Arctic.

Alphabet shares which match the criteria as those used in Arctic (not just a right to income, equal voting etc) are IMHO not in the same class as preference shares or dividend waivers. I see no difference in using alphabet shares than splitting the company 50:50 or 75:25 or even 99:1 with ordinary shares of the same class. I don't see it as risky and, as has been said before, it's something that InTouch have written about in the past as well.

I completely agree with the reasoning here ^^^^^^
But not the conclusion.
Arctic Systems test case was all about the same class of share, and that in itself doesn't preclude the use of alphabet shares, but neither does it explicitly class alphabet shares as being the same. That would need another test case.
On that basis I have avoided them.

In fact you could, IMO, buy/sell/gift normal shares, on a whim, to your spouse, without the need for alphabet shares whilst being protected by the Arctic Systems test case. So the need for alphabet shares is removed.

The fact that opinion is split on alphabet shares demonstrates a lack of clarity as well.

If anyone other than a spouse (married or civil partner) is involved then forget it anyway.

IANAL

[Fred Bloggs]

I'm sure you know more about it than I do, but I cannot see how alphabet shares link into MSC legislation at all.

(Very) Briefly, Brookson and others used "composite companies". For example, you and 25 other contractors would all be share holders of "Brookson 123 Ltd" and you would each hold a share from A through to Z.

The dividend declared each week or month for each alphabet share was related directly to that shareholders invoiced income. So, the alphabet shareholders effectively got all the tax advantages of incorporation but none of the risks. All the alphabet shareholder did was to send in a timesheet each week/month. All the admin, banking and compliance etc was done by Brookson (or other provider).

So, as you can see, this really was blatant abuse of the incorporated business model. HMRC's attitude was further hardened (I believe) by the "come and get us" attitude of the composite company providers. A very key part of the composite company structure was the use of alphabet shares. Hence, my belief that it is not
a suitable model for a one man and his spouse business.

HTH.

Other opinions are available etc........

[SlipTheJab]

(Very) Briefly, Brookson and others used "composite companies". For example, you and 25 other contractors would all be share holders of "Brookson 123 Ltd" and you would each hold a share from A through to Z.

The dividend declared each week or month for each alphabet share was related directly to that shareholders invoiced income. So, the alphabet shareholders effectively got all the tax advantages of incorporation but none of the risks. All the alphabet shareholder did was to send in a timesheet each week/month. All the admin, banking and compliance etc was done by Brookson (or other provider).

So, as you can see, this really was blatant abuse of the incorporated business model. HMRC's attitude was further hardened (I believe) by the "come and get us" attitude of the composite company providers. A very key part of the composite company structure was the use of alphabet shares. Hence, my belief that it is not
a suitable model for a one man and his spouse business.

HTH.

Other opinions are available etc........

+1 Why add unnecessary risk when you don't have to.

[MrMarkyMark]

FTFY

+1 Why add unnecessary risk when you don't have to, for a measly few hundred quid.

[d000hg]

I completely agree with the reasoning here ^^^^^^
But not the conclusion.
Arctic Systems test case was all about the same class of share, and that in itself doesn't preclude the use of alphabet shares, but neither does it explicitly class alphabet shares as being the same. That would need another test case.
On that basis I have avoided them.

In fact you could, IMO, buy/sell/gift normal shares, on a whim, to your spouse, without the need for alphabet shares whilst being protected by the Arctic Systems test case. So the need for alphabet shares is removed.

The fact that opinion is split on alphabet shares demonstrates a lack of clarity as well.

If anyone other than a spouse (married or civil partner) is involved then forget it anyway.

IANAL

How does not using alphabet shares (or dividend waivers) allow one to flexibly control dividend distribution year-to-year? Are you suggesting you move the shares back and forth or something?

[Lance]

How does not using alphabet shares (or dividend waivers) allow one to flexibly control dividend distribution year-to-year? Are you suggesting you move the shares back and forth or something?

personally I don't bother. Mrs. L. has 20% and if that's not especially tax efficient one year then hey ho. It's not a huge difference.

But there's nothing to stop her buying shares from me. They're only £1 each.

Note that if there's a ton of cash in the company then gifting them may be a better idea as valuing a company at massively under market rates is another high-risk action IMO.

[northernladuk]

personally I don't bother. Mrs. L. has 20% and if that's not especially tax efficient one year then hey ho. It's not a huge difference.

But there's nothing to stop her buying shares from me. They're only £1 each.

Note that if there's a ton of cash in the company then gifting them may be a better idea as valuing a company at massively under market rates is another high-risk action IMO.

And this feels a lot safer and more sensible than pushing it to the point you've only got case law to defend yourself

I'd be interested to see the actual tax saved between someone making a pretty good stab at a split like Lance has compared to someone that's going to push it to the absolute penny using different classes. I can't imagine if you get it right it's a lot.

[WordIsBond]

OP, you asked what others are doing. My case is different because I'm not a one-man band, I have employees, including but not exclusively family members.

I have two class shares. The general advice everywhere you look is that different class shares are legal but should be for a business purpose. The advice also emphasises share rights. My class shares have equal ownership and voting rights. The business purpose is to provide a profit-sharing mechanism for employees (via the B shares) while maintaining control of the business (via the A shares). A percentage of profits is distributed to all B shareholders, the remaining profit is distributed to A shareholders (my wife and I). We have far more A shares than B shares, maintaining 80% control of the company, but as a result the dividend per share is much higher for B shares than for A shares. I did have legal advice on this structure. It seems unlikely to be applicable to your question, however.

What is applicable to your case is that my wife owns the same number and type of shares as I do. This is entirely legal and has been court-tested. It is not perfectly tax efficient, sometimes one of us has more outside income than the other. By having the same number of shares, we either have to send the one with higher income into the higher rate band or not use up the entire basic rate band of the one with lower income. This is not particularly important to me -- in general, it is a very tax-efficient structure and I'm not particularly bothered by minor inefficiencies.

My wife is also a director. Again, this is entirely legal. And directors can receive a stipend. My wife also does our bookkeeping, bill paying, payroll, invoicing. She receives a salary of £8K for this. Given all that she does, I could probably justify £11K, but we've used our employment allowance on other employees, so that wouldn't be tax efficient.

You could make your wife a director, and pay her a stipend for that. Any payments have to be for business purposes. It would probably be difficult, if you are a one-man band and she does nothing but attends board meetings, to justify that a salary of £8K was for business purposes. As far as I know, though, HMRC has never challenged such an arrangement. I personally would not want to be defending it if they decided to make me the test case, and I would not recommend an £8K salary for someone who does nothing in the business. I am not saying it is illegal, and like I said I don't think it has ever been tested, but it seems risky to me. If she does bookkeeping / invoicing / payroll, for a one man band, that would justify a higher amount than if she is a do-nothing director. You might pay an outside company £2-3K a year for that, add a £5K director's stipend for the legal responsibility / liability of being a director, and you reach £8K.

If your wife is employed elsewhere, you can pay yourself an £8K salary, and you then have £34K in basic rate band left. You can give her shares so you have a 7-1 share division, and pay annual dividends of £5K / share, and she gets her £5K exempt, and you get £35K, which pushes £1K into higher rate band this year. This would be entirely legal. If her outside income is well within the basic rate band, you could make it a 7-2 split and she gets £10K in dividends. The right split is based on her likely income and whether you have any outside income.

If you change your shareholding split with her regularly to maximise tax efficiency, that would likely be interpreted as aggressive tax avoidance beyond the intent of the law. I wouldn't recommend it. I'm not saying you should consider your shareholding as set in stone once you've done it, but I wouldn't change it every year or anything.

Someone above suggested it would be better to pay dividends into separate accounts, rather than the same account. We do that. It is a minor point, but it would be easier for them to argue that the shareholding is a fiction and it is really all my income if it went into the same account. We've had two accounts for years, both of them joint accounts. One is the one all my income has always gone into. The other is the one her child benefit and income has always gone into. Both were joint accounts, but we found it better to have two accounts in case something went wrong with one, and after the child benefits fiasco where many account details were stolen, we decided we didn't want our main income going into our child benefits current account. My wife's salary and dividends are paid into the account we've always used for her income.

It's not going to change the realities of the case if you are doing something on the wrong side of the law, but it is one of those little marginal things you can easily do to strengthen your case if it looks shaky. It's sort of like avoiding eating in the company canteen to bolster your IR35 status -- it won't change anything if you are clearly inside or clearly outside, but if the case looks questionable at all, the more little things you have, the more things your lawyer has to argue on your side. So we use separate accounts.

You can make your wife a shareholder, you can give her dividends, you can make her a director, you can give her a salary and/or director's stipend (but have to be able to defend that it is for business purposes), you can even use alphabet shares which are perfectly legal (but it is probably a bad idea for a one man band -- what's the business purpose?). As to what makes sense, that depends largely on outside income and on your risk tolerance. I do all of those things (shares, dividends, director, salary, alphabet shares). If I were a one-man band, the salary would be lower (her responsibilities would be much smaller) and I wouldn't use the alphabet shares. I don't use them to distinguish between her dividends and mine, that would be beyond my risk tolerance level. I use them for a business purpose that would no longer apply if I were a one-man band.

[WordIsBond]

I'd be interested to see the actual tax saved between someone making a pretty good stab at a split like Lance has compared to someone that's going to push it to the absolute penny using different classes. I can't imagine if you get it right it's a lot.

I think the difference would depend on how high, and how stable, the outside income is. I have a fairly stable outside income, my wife's is pretty variable (sometimes exceeds mine, sometimes doesn't). It meant last year (when hers was high) that we underpaid dividends to keep her out of higher rate band and so didn't use up about £2K of my basic rate band. If we knew how much each of us was going to get each year, we could get the shareholding spot on. But it isn't particularly important, we're saving a lot by having her as a director and shareholder, I'm not concerned to try and get it perfect.

[d000hg]

Thanks a lot WiB for the lengthy and interesting reply. The clause "for business purposes" seems key to your thinking here and that makes a lot of sense - I do not necessarily feel comfortable using loopholes which are seemingly clearly outside the spirit of the rules even if 100% legally above board. More for my own personal morality boundaries than for fear of investigation - as with risk profiles we all have our own individual lines what we feel comfortable with in terms of risk, ethics, and "can I be arsed".

From your arguments, alphabet shares in my case wouldn't be for any purpose except to maximise tax-free income in a calculating fashion. Someone else could argue that's just maximising the company's return to the share-holders of course but it doesn't sit too well with me at least from what I've thought so far.
Whereas a fixed allocation of class A shares as a gift to my wife 'feels' better even if it makes very little difference.

Equally I'd feel a bit dubious paying a salary/stipend, giving a share of the company to her is one thing but actively paying her when she does no work is another - again in my eyes only, no judgement on those who draw their lines differently