Do those of you with shared household finances give shares to your spouse?

[d000hg]

I've looked into alphabet shares before but was put off as they seemed a little dodgy. And historically myself and my wife were both on comparable-ish incomes so it wasn't a big help. But she is leaving work and I was most surprised that my well-respected, morally upright IFA recommended issuing her class B shares with the advice "HMRC won't like it but married couples have the right to arrange their income efficiently, and if they took you to court they would lose".

Of course not everyone here is married and of those who are, many don't operate shared finances. But for those who do, here is a poll

In 2018, what is the general feel on such things? Any good articles on the topic?
Clearly I cannot simply use faux employment to pay my wife for nothing. But on the other hand if I die, she inherits the company so gifting her shares doesn't seem unreasonable. And I DO understand married couples are treated differently to me just giving my mate Dave some shares?

[Old Greg]

All of the above.

[d000hg]

All of the above.

I can always rely on your sage wisdom

Another way to word my question: if your accountant/advisor recommended this, would you be surprised? I've definitely had my accountant say they were happy to do this in the past, with caveats, but IIRC discussion a couple of years here was quite negative.

[Maslins]

Would be fine with it except for the alphabet shares bit. I think one thing that was critical in Arctic Systems case was husband and wife had the same shares, so legally she had just as much power as he did. With A and B shares, you're making a clear distinction, so we recommend against them (bla bla except where genuine commercial reason yadda yadda).

[mudskipper]

I'm considering the same.

Mr ms has done a few days (fee earning!) work for myCo, but because he's been made redundant, he's already maxed out higher rate this year. He doesn't want to be a director as he hasn't got the info he needs for a tax return. So the easiest seems to be alphabet shares and a couple of K divvies.

[northernladuk]

I'm considering the same.

Mr ms has done a few days (fee earning!) work for myCo, but because he's been made redundant, he's already maxed out higher rate this year. He doesn't want to be a director as he hasn't got the info he needs for a tax return. So the easiest seems to be alphabet shares and a couple of K divvies.

Doesn't he get payment in kind??

[Manic]

Would be fine with it except for the alphabet shares bit. I think one thing that was critical in Arctic Systems case was husband and wife had the same shares, so legally she had just as much power as he did. With A and B shares, you're making a clear distinction, so we recommend against them (bla bla except where genuine commercial reason yadda yadda).

This.

My spouse is not a director but holds 50% shares.

[Iliketax]

I was most surprised that my well-respected, morally upright IFA recommended issuing her class B shares with the advice "HMRC won't like it but married couples have the right to arrange their income efficiently, and if they took you to court they would lose".

Did your morally upright IFA mention HMRC's guidance on this: ERSM60030 - Employment Related Securities Manual - HMRC internal manual - GOV.UK

Example 3: alphabet soup
A company uses special classes of shares to pay all or most of employees’ wages as dividends. Each employee will have their own class of shares so different dividends can be paid to each. The shares have no rights other than that the employer can award dividends at his discretion.
Each dividend is acting as if it were a cash bonus specific to the employee. Each time the dividend is voted the value of the share will rise and each time the dividend is paid, the value will fall again. The accumulated rises for the year will be artificial increases in value of the shares caught by Chapter 3B - the legislation disregards the falls in value.

If there is a large number of employees the classes of shares may be designated A, B, C, etc. hence the generic description “alphabet soup”.

What HMRC says is that when you declare a dividend the value of the shares goes up. So you as the employee, not your spouse, will pay income tax on that increase in value. Then your spouse will pay tax on the dividend. So that's two lot of tax on the same thing. Now it no one is paying tax, who cares. If you were both to pay the highest rates, that's 83.1%. You'll be somewhere in between.

Now your morally upright IFA might well be right that HMRC might lose in court. They might say that all the "things done" are done for "genuine commercial purposes" (which is defined not to include anything done as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions). But equally your morally upright IFA may not know about tax. You could ask them? Maybe ask them how Chapter 3B of Part 7 ITEPA 2003 might apply if the revenue got a bee in their bonnet?

And just to be clear:

1. This has absolutely noting to do with the settlements legislation.

2. If all of the shares are the same class then it doesn't apply.

And just to be unclear, you may lose ER relief with alphabet shares. The legislation in the current Finance Bill is pants, but the obvious wording is that relief is lost. HMRC are trying to squint at it to see if it is ok. My guess is that this is something that will get tweaked at the Report Stage but no one will know for sure in the next few weeks.

[Spoiler]

I've looked into alphabet shares before but was put off as they seemed a little dodgy.
<snip>
Clearly I cannot simply use faux employment to pay my wife for nothing.

Two different things here ?? Shareholding is not employment/salary.

My setup is:
I'm sole director
Me/Spouse 50% shareholders (no alphabet nonsense) = equal dividends
I take a salary
Spouse doesn't get a salary, as they are not employed by the Ltd

[d000hg]

Did your morally upright IFA mention HMRC's guidance on this: ERSM60030 - Employment Related Securities Manual - HMRC internal manual - GOV.UK



What HMRC says is that when you declare a dividend the value of the shares goes up. So you as the employee, not your spouse, will pay income tax on that increase in value. Then your spouse will pay tax on the dividend. So that's two lot of tax on the same thing. Now it no one is paying tax, who cares. If you were both to pay the highest rates, that's 83.1%. You'll be somewhere in between.

Now your morally upright IFA might well be right that HMRC might lose in court. They might say that all the "things done" are done for "genuine commercial purposes" (which is defined not to include anything done as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions). But equally your morally upright IFA may not know about tax. You could ask them? Maybe ask them how Chapter 3B of Part 7 ITEPA 2003 might apply if the revenue got a bee in their bonnet?

You mention employees here. I'm on a salary but isn't it a key point that many of us are directors but NOT employees?

Let's look at that page you linked (thanks by the way):

Example 3: alphabet soup
A company uses special classes of shares to pay all or most of employees’ wages as dividends. Each employee will have their own class of shares so different dividends can be paid to each. The shares have no rights other than that the employer can award dividends at his discretion.
Each dividend is acting as if it were a cash bonus specific to the employee. Each time the dividend is voted the value of the share will rise and each time the dividend is paid, the value will fall again. The accumulated rises for the year will be artificial increases in value of the shares caught by Chapter 3B - the legislation disregards the falls in value.

If there is a large number of employees the classes of shares may be designated A, B, C, etc. hence the generic description “alphabet soup”.

So they talk about using alphabet shares to pay all employees via dividends, to avoid salary=>income tax. But my wife isn't an employee or involved in the running of the company.
Further, they talk about this "soup" when many classes of share are used so everyone gets their own share class. I'm talking about one additional share class, specifically for my spouse - as I've said I thought HMRC made special dispensation/understanding for financial arrangements between husband/wife?

So I'm struggling to see this is the case I am discussing?

A further query - why is it absolutely fine if I gift my wife some class A shares but potentially sticky for class B? What is the distinction legally/HMRC-wise?
Obviously the limitation with gifting class A is that the ratio of dividends is fixed. Now presumably spouses can each year re-gift shares to obtain they ratio they want but that seems substantially more artificial, personally. I've no idea if people do that?