How to pay dividends to foreign shareholders

[TheCyclingProgrammer]

Thanks for your productive reply. I don't have to carry cash across borders. If her dividends can be withdrawn as cash, this can be sent to her by some valid money transferring means such as Western union and she can withdraw from western union in India with her ID.

This is fine but I would advise you have documentation and a clear paper trail clearly showing the money being sent to your mother so it is clear that the correct shareholder has been paid otherwise you do risk HMRC accusing you of taking the money and being taxed on it.

[malvolio]

S624 does not change the fact that shareholders are not required to do anything in return for their shares.

If OP has willingly given up 25% of his business and 25% of the profits to a family member with no strings attached and no arrangements for those shares or dividends to come back to them then they are very unlikely to be caught by the settlements legislation.

The settlements legislation is generally more of a risk between spouses because in that case you need to ensure the spouse exemption applies otherwise the arrangement will be caught by default.

Wrong....

Look up "connected persons".

[TheCyclingProgrammer]

Wrong....

Look up "connected persons".

Oh look who has popped up once again to demonstrate their lack of understanding of the settlements legislation.

As you have been told many times on here there is no mention of “connected persons” under the relevant settlements legislation so please stop repeating this guff.

The only relationships explicitly mentioned in the settlements legislation is that of a spouse or civil partner, or a minor child.

The “connected person” rule to which you refer relates to CGT and assets, not settlements legislation. There may be CGT issues arising from gifting shares under market value to a connected person but not income tax issues, generally.

[Lance]

Thanks for your productive reply. I don't have to carry cash across borders. If her dividends can be withdrawn as cash, this can be sent to her by some valid money transferring means such as Western union and she can withdraw from western union in India with her ID.

Not cash then
You can do a bank transfer for that, and not have to take cash out at all. That's going to be lower risk IMO.
Have a look at Transferwise. Better rates than Western Union.

Also, you need to be sure that the money doesn't come back to you. Mess around with cash transactions and the likelehood of you being challenged that the transfer wasn't real increase greatly. Funnily enough HMRC aren't keen on cash transactions for anything other than small (i.e. a few hundred quid) amounts.

[northernladuk]

If OP has willingly given up 25% of his business and 25% of the profits to a family member with no strings attached and no arrangements for those shares or dividends to come back to them then they are very unlikely to be caught by the settlements legislation.

The settlements legislation is generally more of a risk between spouses because in that case you need to ensure the spouse exemption applies otherwise the arrangement will be caught by default.

What you say is the reason why there is the settlements legislation and we get that they came in to force to close loopholes and reduce abuse but it does clearly say in that article.

So to avoid HMRC claiming that shares and income has been ‘settled’ by the fee-earning contractor on their non-free earning partner, the income must be justified on commercial grounds.

It then goes to give two examples you could do to avoid the risk, neither of which can be done here.

So yes the OP wouldn't be breaking the spirit of the legislation but is falling foul of the wording surely?

EDIT : Just looked through the forums for similar threads and in nearly all of them the advice is not to do it. It's got to be classed aggressive avoidance sending company money to your parents rather than personal. I'm struggling to see why you think it's OK in this example.

[WordIsBond]

So yes the OP wouldn't be breaking the spirit of the legislation but is falling foul of the wording surely?

He might be falling foul of the wording of that article, but not of the wording of the legislation (S624). The section is headed, 'Income where settlor retains an interest.' In this case, OP is NOT retaining an interest in the money. HMRC might argue, if his mum is on her deathbed, and he's her sole heir, that he's just pumping money into her estate to circumvent his tax obligations. But I'm presuming that's not the case, if mum doesn't even have a bank account I doubt this money is ever coming back to him. (Anyway, the legislation doesn't mention such a case so boosting an estate might even be legal, but it might be claimed to fall foul of aggressive anti-avoidance legislation.)

So, TCP is right (as usual) on this topic. The legislation also, as he said, makes no mention of 'connected persons' other than spouses or children. It's just not there. Section 625 goes into some detail about what constitutes retaining an interest.

On other matters, OP, I'd strongly advise against cash. If you are using Western Union, make the payment from your business account to Western Union. That way, the money is leaving directly from your business account to be payable to your mum. Much cleaner and much less likely to scrutinized by HMRC. I could see an aggressive inspector claiming that you took the dividend, and that any money you sent to your mum was a personal gift. You'd probably eventually be able to make them go away but taking dividends in cash just 'isn't done', so it will draw additional scrutiny. So make the payment from your business account.

Someone above suggested Transferwise. I'm not sure that would work if mum doesn't have an account for them to transfer funds into. If you can figure out how to make that work it will save quite a bit.

You really should get your mum to open a bank account. If you are going to be sending her substantive sums regularly, Western Union is a very expensive way to do it. If she opens a bank account, you can use Transferwise to drop money into it every time you pay a dividend.

The only advantage I can see to the cash/Western Union route is that she can presumably avoid tax in India by claiming it is a personal gift from you. If that's the plan, I would strongly advise you NOT to do it. When HMRC come asking, and they will eventually, they will not only want to see proof that you actually did send her the money, they will also want to see proof that she reported it and paid taxes on it. If she hasn't, then they WILL say that this is obviously not income for her, it is income for you and a personal gift from you to her. And they will then treat it as salary, not dividends, on which you should have been paying National Insurance as well as income tax, plus penalties, plus interest. JUST DO NOT DO THIS. This has to be personal income for tax purposes either for you or her.

Good luck with it all. You can do this legally and you are doing the right thing by asking how to get it right. Just make sure it is all reported for tax purposes and doesn't look like a payment to you (cash would), and you should be fine.

[northernladuk]

I'm confused. So it's open season in close relative having shares in the company then?

[oilboil]

The settlements legislation is generally more of a risk between spouses because in that case you need to ensure the spouse exemption applies otherwise the arrangement will be caught by default.

The settlements legislation does not apply to spouses
HMRC cannot apply the settlements legislation to arrangements between spouses. This was confirmed by the House of Lords ruling against HMRC in the Arctic Systems case. HMRC had tried to prove that IT contractor Geoff Jones, the fee-earning spouse in a husband-and-wife-owned limited company, had made a ‘bounteous settlement’ of shares in his company on his wife Diana, a non-fee earner.

HMRC had argued that the resulting dividend payments to Diana should be treated as Geoff Jones’ income, and taxed accordingly. But HMRC lost the case, and the ruling has provided married contractors with certainty about the settlement legislation’s exemption for spouses and civil partners.

As long as the shares are ordinary class shares, this means a fee earning contractor can jointly own a limited company with their non-fee-earning spouse or civil partner, split the income from the ordinary shares, and have no fear that HMRC will attempt to tax all the income as the contractor’s.

[WordIsBond]

I'm confused. So it's open season in close relative having shares in the company then?

'Open season' implies there are no rules. That's not quite the case.

If you have half a million quid in your company and you give your cousin 50% of the company you have gift tax issues, undoubtedly. But if you have a company with no funds, especially if it is a startup, and you want to give your cousin half of it, well, set the share capital at £1 / share, and issue him one share and one to you, and make him pay his £1.

If he actually owns the shares, and you aren't using alphabet shares to play silly games with it so that he doesn't have voting rights, and (most crucially) the money is never coming back to you in any way, you've got no problems.

You can give your spouse shares even if you have retained funds, no issues there. Just make sure you understand how the spouse exemption works so you don't mess it up.

Don't try to give shares to your kids, though. It's not going to work. Ok, I gave shares to my kids when we started -- but not to minors, and they are active participants (fee earners) in the business.

[jmann]

It really depends on what sort of business you are conducting under a limited company. If you are a contractor working as limited company then HMRC could investigate this. There is no reason for you to gift shares to relatives when they are not contributing anything.

If you are running a business then I do not see any problem with this. I know lots of people are doing this to avoid paying tax. They gift shares to relatives in other countries and they never had any problem. Even if they investigate, you can easily come up with a reason for gifting shares.