[Tax Planning][17/18] Company structure - spouse

[RonBW]

It's not far but it is different. Arctic was argued on a number of things being a fairly complex case and it had to go to appeal.

Actually, it wasn't that complex, and there was a very good reason why the Jones had to go through so many appeals - because even though they were right at every stage of the process from tribunal through to House of Lords, HMRC would not accept that their interpretation of the law was flawed. The requirement to show that you are right is different from a case being complex.

Very difficult to argue that when she's working full time.

It depends on what is being done and when it is being done - is it impossible to work on a weekend or in an evening for the company? IIRC, the Jones v Garnet judgement didn't hinge on the amount of work that Diana did for the business at all (for she didn't do a great deal) - every hearing found that was irrelevant, and that the gift of shares which were more than a right to income, between spouses was not (and could not) be a settlement. You point is not only easy to debunk but is irrelevant.

Again doesn't exist in this setup

You're right - HMRC would lose on this point again, as they did in Jones v Garnet.

The OP's setup has no business purpose at all either as I suspect many people who are going to jump on Alphabets.

Again, this is exactly what was argued in the Arctic case - there was no business purpose, and there does not need to be one. Arctic would support this case.

There is a comment about salary drawn which in the OP case he thinks he has a right to and won't change it so losing this defense.

I think anyone running a business would be stupid to assume that they will always take the same salary regardless of the business performance. I see nothing in the posts from the OP that indicate that this is what they intend - you are trying to infer from their posts something that just isn't there. I don't think anyone is saying that in the future this will always be the same - therefore there is no loss of this as a defence.

Also using B class shares to top up to the limit also means her dividend income won't change on the changing income from the company either which it would in a 50/50 split in Arctic so they could throw that aspect in that wasn't there for Arctic.

Again, you are assuming that the rate of dividend paid on either class of share will remain constant throughout the time of ownership, which is a stupid assumption to make. How do you know that her dividend income "won't change on the changing income" - if the company makes no money then that would be illegal to pay out a dividend, for example.

She did still pay some tax on the money she got.

What is there that prevents the OP's wife from paying any tax that is due? You are (yet again) making an assumption based on no fact to try to support your view that the alphabet shares are aggressive tax avoidance which should be avoided at all costs.

and at the very bottom is...

Bear in mind that you are quoting from a view point on the result of the Court of Appeal judgement, which wasn't the final one (indeed the article even says that an appeal to the House of Lords is unlikely!) - I don't believe that the final judgement says anything around Diana Jones needing to genuinely contribute to the running of the business or not.

They won on appeal.

NO THEY DID NOT. Geoff and Diana Jones did NOT win on appeal - HMRC LOST ON APPEAL. That's a huge difference - the Jones won at EVERY stage of the legal process. To imply that that they needed to appeal the judgement to win is highly inaccurate.

--

Even if everything that you write is correct (hint - it utterly isn't!), then that ignores the key bit that I said earlier as well. If the company has no value, then how can a gift of shares be a settlement?

(Hint - it can't be)

[northernladuk]

Maybe you need to update your frequent advice to ask an accountant or TCP?

I would look carefully at the advice given in this and other threads around alphabet shares before branding them aggressive tax avoidance. The OP's situation doesn't seem that far from the judgement in Arctic - as long as the share is not just a right to income, and the share gift has been done correctly, then it would fall outside the settlements legislation. If the share is merely a right to income then the judgement that Geoff and Diana Jones secured in Arctic would potentially not apply in this case and so HMRC would need to take the case on and win - which is no mean feat for them, given their current attitude to taking settlements cases on since Arctic (anyone got a reference for any case since then that HMRC have fought and won on this subject??)

It would obviously be different if the OP was giving a share in the business to a family member or to an unmarried partner (for example) but as long as the share gift was done correctly, to a spouse, and isn't just a right to income then I cannot see how HMRC would have any more success than they did during Jones v Garnet.

Furthermore, the OP is setting the company up just now and so there is no value in any of the shares that are being given to anyone - it would be difficult to argue that there has been any settlement at all, since the company has no value. I presume that this is how some people who give shares to non-spouses (either using alphabet shares or otherwise) avoid the settlements legislation.

It's not far but it is different. Arctic was argued on a number of things being a fairly complex case and it had to go to appeal. A few of those things were...

The Court would not 'ignore the increasing tendency for married couples to be involved in the business of each other on a commercial non-bounteous basis…Though one spouse may generate the income of the firm or company, the services of the other may be just as commercially important in providing the essential administrative, accounting, support and backup services.'

Very difficult to argue that when she's working full time.

For the first time, (the Revenue) seek to apply the (settlements provisions) to what has been found to be a normal commercial transaction between two adults, to which each is making a substantial commercial contribution, albeit not of the same economic value. Such a difference, by itself, is not enough to my mind to take the arrangement into the realm of "bounty", as it has been understood in the existing cases.' (para 108)

Again doesn't exist in this setup

In other cases, certain of the events that had occurred had 'no business purpose whatever. The element of bounty was clear' (para 80), or were 'clearly parts of an arrangement and the element of bounty was conceded' (para 81)

The OP's setup has no business purpose at all either as I suspect many people who are going to jump on Alphabets.

but here it was observed that 'What they eventually drew by way of salary seems to have depended on how well the company performed and on other factors, and in the event there were years when Mrs Jones drew no salary at all, enjoying no remuneration for her work as an employee.

There is a comment about salary drawn which in the OP case he thinks he has a right to and won't change it so losing this defense. Also using B class shares to top up to the limit also means her dividend income won't change on the changing income from the company either which it would in a 50/50 split in Arctic so they could throw that aspect in that wasn't there for Arctic. She did still pay some tax on the money she got.

and at the very bottom is

Conclusion

In broad terms, the effects of this decision are that husband and wife companies should be free to determine for themselves how they run their businesses and allocate profits, without falling foul of the 'settlements' legislation, in circumstances where


the party directly generating the income makes no ongoing commitment to work for less than 'market value'; and
both parties genuinely contribute towards the operation of the business.

I strongly suspect the way the OP has approached this plus his full time work he cannot fulfil the bottom circumstance...

The Arctic case (Court of Appeal decision) :: Contractor UK

No I'm not right smart and this legal stuff confuses me but although this case is 'similar' to the Arctic case it's enough different to be a real problem. They won on appeal. Using B class takes it one step further so not unreasonable to assume the risk substantially increases.

[RonBW]

Technically but TheCyclingProgrammer is one our most eminent posters on financial matters and his advice rates up there with the accountants IMO.

Maybe you need to update your frequent advice to ask an accountant or TCP?

I would look carefully at the advice given in this and other threads around alphabet shares before branding them aggressive tax avoidance. The OP's situation doesn't seem that far from the judgement in Arctic - as long as the share is not just a right to income, and the share gift has been done correctly, then it would fall outside the settlements legislation. If the share is merely a right to income then the judgement that Geoff and Diana Jones secured in Arctic would potentially not apply in this case and so HMRC would need to take the case on and win - which is no mean feat for them, given their current attitude to taking settlements cases on since Arctic (anyone got a reference for any case since then that HMRC have fought and won on this subject??)

It would obviously be different if the OP was giving a share in the business to a family member or to an unmarried partner (for example) but as long as the share gift was done correctly, to a spouse, and isn't just a right to income then I cannot see how HMRC would have any more success than they did during Jones v Garnet.

Furthermore, the OP is setting the company up just now and so there is no value in any of the shares that are being given to anyone - it would be difficult to argue that there has been any settlement at all, since the company has no value. I presume that this is how some people who give shares to non-spouses (either using alphabet shares or otherwise) avoid the settlements legislation.

[pr1]

Less Student Loan Payments of £0.00

Have you said that's £0 because you don't have a student loan or because you think you won't need to pay anything back on it? (the latter is not true)

[Neil@Intouch]

I was being pedantic about this.

Good spot

Some of the other company check sites don't though so it's not clear and agents and like may not be smart enough to understand the different classes and will just assume wrongly?

Yes very true, but I would hope most agents would then speak to the clients to get further details to clarify this point. Assume wrongly is a given!

[Louisa@AardvarkAccounting]

Gotcha, I will def do that, just want to gather some info in advance. Also, should the accountants be trusted? They seem like a dodgy bunch

Yes, we're such terrible people... Always trying to look out for our clients and help you save tax where possible...

[atanas]

You not get the bit about asking your accountant?

Gotcha, I will def do that, just want to gather some info in advance. Also, should the accountants be trusted? They seem like a dodgy bunch

[northernladuk]

For the OP scenario I would advise, as Accountant's are role isn't to tell clients what to do.

I was being pedantic about this.

I would advice an alphabet share structure

If you are referring to information held on CH, then yes this would show the classes of shares issued (SH08).

Some of the other company check sites don't though so it's not clear and agents and like may not be smart enough to understand the different classes and will just assume wrongly?

[northernladuk]

You not get the bit about asking your accountant?

Where is your warchest in all that?

[atanas]

What do you guys think about this arrangement:

Dividends to be paid: £70,000

Spouse

• No salary paid
• Shares: 1 [10%]
• PAYE Income: £32,464
• Dividends: £12,536

Breakdown:

£11,500.00 Personal Allowance
£20,964.00 PAYE Taxable
-->Basic @ 20% £20,964 = £4,193
-->Higher @ 40% £0 = £0
-->Top @ 45% £0 = £0
£4,192.80 PAYE Tax including taxable redundancy
£2,916.00 PAYE NIC's
-->remaining p.a £0.00
-->remaining basic band £12,536.00
-->remaining higher band £116,500.00
£0.00 NIC Exempt Income Tax
-->Basic @ 20% £0.00 = £0.00
-->Higher @ 40% £0.00 = £0.00
-->Top @ 45% £0.00 = £0.00
-->remaining p.a £0.00
-->remaining basic band £12,536.00
-->remaining higher band £116,500.00
£565.20 Dividend Tax
-->Taxable Dividend £12,536.00
-->Dividend Allowance @ 0% £5,000.00 = £0.00
-->Ordinary @ 7.5% £7,536.00 = £565.20
-->Upper @ 32.5% £0.00 = £0.00
-->Top @ 38.1% £0.00 = £0.00
-->remaining p.a £0.00
£0.00 Capital Gains Tax on Residential Assets
-->remaining basic band £0.00
-->remaining higher band £116,500.00
£0.00 Capital Gains Tax on Other Assets
-->remaining basic band £0.00
-->remaining higher band £116,500.00
£45,000.00 Total Gross Income
£4,758.00 Total Tax Due
£2,916.00 Total NIC's Due
£7,674.00 Total Tax+NIC Deductions
All Deductions £7,674.00
Net Income £37,326.00
Effective Tax Rate 17.1%

Director

• Director Salary: £8,164
• Shares: 9 [90%]
• Dividends: £36,500
• Private pension: £21,000

Breakdown:

£11,500.00 Personal Allowance
£0.00 PAYE Taxable
-->Basic @ 20% £0 = £0
-->Higher @ 40% £0 = £0
-->Top @ 45% £0 = £0
£0.00 PAYE Tax including taxable redundancy
£0.00 PAYE NIC's
-->remaining p.a £3,336.00
-->remaining basic band £59,750.00
-->remaining higher band £116,500.00
£0.00 NIC Exempt Income Tax
-->Basic @ 20% £0.00 = £0.00
-->Higher @ 40% £0.00 = £0.00
-->Top @ 45% £0.00 = £0.00
-->remaining p.a £3,336.00
-->remaining basic band £59,750.00
-->remaining higher band £116,500.00
£2,112.30 Dividend Tax
-->Taxable Dividend £33,164.00
-->Dividend Allowance @ 0% £5,000.00 = £0.00
-->Ordinary @ 7.5% £28,164.00 = £2,112.30
-->Upper @ 32.5% £0.00 = £0.00
-->Top @ 38.1% £0.00 = £0.00
-->remaining p.a £0.00
£44,664.00 Total Gross Income
Less Paye Pension Contributions of £0.00
Less Private Pension Contributions of £21,000.00
Less Student Loan Payments of £0.00
£21,000.00 Total Other Deductions
£2,112.30 Total Tax Due
£0.00 Total NIC's Due
£2,112.30 Total Tax+NIC Deductions
All Deductions £23,112.30
Net Income £21,551.70
Effective Tax Rate 4.7%

Total taxes: £2677 to extract £49,000 in dividends and put the £21,000 into a private pension