Dividend Splitting - And subsequent benefit to me. Legal?

[heff]

I think I know the answer to this before I even ask it, as what I'm suggesting could be considered evasion, but that is why I'm asking.

My partner is moving into my flat with me, and I want to take the dividend splitting route. All is fine there, she will earn her divvies with paperwork and all the rest.

What I want to know is, what if she used the divs paid to her, to pay the rent, bills, dinners out, holidays etc etc. The tenancy and bills are in my name, so I'm guessing this is a big no no. But then again, does it really matter? Does it matter if the money used to pay rent or a bill comes from someone else's account? What if both our names were on the tenancy etc? Can she still pay all of it or does it have to be half half? Is this a grey area, or is it just plain illegal? In an investigation it would clearly look bad. It would look like I'm splitting dividends and having her pay what I previously paid in order to pay less tax myself. And that is exactly what I would be doing.

The reason for doing this is I'm trying to save up for a deposit on a property, and the less of my divvys I spend the sooner I'll get there. My partner of course is perfectly happy with all this, as she would suddenly have access to nice wad of cash to buy her womanly stuff with. That of course is a separate problem.

[matzie]

Hi Heff

There's a lot going on in that post of yours there, and several quite deep misconceptions I think. For example, you said,

"she will earn her divvies"

Dividends are payments out a business's profits to its shareholders. They aren't earned as such and are not payment for work done or not. Having two shareholders is thus very tax efficient. Very many of us here have structured our business in this way and whilst there was much debate on this a few years ago, the consensus now is that this is a safe approach to take, especially if the shareholding is set up that way at incorporation. There is still room for risk with regard to things like dividend waivers (best left well alone) or possibly even with after-incorporation gifts of shares (though I think that's still considered safe)

However, if you chose to pay a partner a salary for work done, then yes, the commerciality of that arrangement matters; it must be a fair payment for work done. The standard "arms length" test applies here - would you pay a third party (not your partner) the same amount for the same work?

But... assuming your partner is a shareholder (and if she's not already, I recommend you seek professional advice re making her one, if that's what you want to do) , you then raise the question of what she does with money she receives from dividends. AFAIK, how someone chooses to spend their money is up to them.

Regardless, you need some professional advice, ie an accountant, and you need to read up on all the various guides available on this site and elsewhere.

Good luck!

[northernladuk]

AFAIK, how someone chooses to spend their money is up to them.

I don't agree, or at least raise a flag and say look at this carefully. If you give her money that she effectively gives back to you to avoid paying tax is clearly wrong. Having her paying your mortgage and bills she is propping you up instead of you drawing more, paying tax and paying your own way. A quick look at your bank statements will show this.

A grey area I am sure but this doesn't look very grey at all. At the very least come up with something a little more clever. This is about as transparent as they come reading the post.

You don't mention your personal situation with your girlfriend but let me assume you haven't been together that long for her to move in to your flat. Again, a very wild assumption, you are not that old. Forgive me if I am wrong but just trying to get worst case situation here. Do you really think it is a wise idea to entrust half of everything you own AND be running a pretty dodgy carry on in front of someone that you are not 100% and trust implicitly. If you split up she is still due half your money as she holds shares and if you don't pay up she shops you and your scheme to HMRC. You will get a new pad ok but be sharing it with a 6ft 25st biker.

[heff]

Hi Matzie, Northernlad,

Thanks for your reply! I have an accountant, who says the divvy splitting arrangement is fine as long as she shows she contributes to the company. Apparently this is necessary when you own shares in a private company. Most articles back this up. Take for example this one:


Apparently the wife has to contribute. Well, we are not even married, so perhaps it doesn't apply.

To northernlad, well, I obviously have given thought to the risks. I'm 28, have been with my partner 4 years.... on and off... regardless, if we did split, she would not try to destroy me and my business. I may loose the divs remaining under her name, but in all likelihood she wouldn't take them. She just isn't like that.

The issue as I see it does not lie with her, but with HMRC. Many couples are apparently doing this income splitting thing, so who's business is it if she decides to pay the (my? our?) rent, so I can save up for the deposit on the house? On the one hand it seems completely fair. What a couple does with their money is their business. On the other hand it sounds totally dodgy.

The other option is I continue paying everything, then when we have enough money for the deposit on the property we both contribute to it. In that case, does she have ownership in the property? Can she just contribute money with no attachment? She doesn't really have any interest in being involved in my property purchase. Maybe that will change in the future. Admittedly this whole thing would be easier if we knew we wanted to spend the rest of our lives together, I'd just give her half and that would be that! But we are not quite there yet.

[eek]

Well that is a tuliply bad 3 year old article.

[NotAllThere]

....Apparently this is necessary when you own shares in a private company...

No it isn't. I own shares in a private company. I stumped up 5% of the initial investment capital, in return for 5% of the shares. I get my dividend income without doing a stroke of work for that company. Which is exactly as it should be.

What will affect you is the Settlements Legislation. The Arctic Systems case was eventually won by the Jones, on the grounds that: "The settlements legislation ... does not apply to companies jointly owned by married couples and civil partners and structured in this way. ". If you want that exemption, then marry the girl. Otherwise, find another way to dodge taxes. Edit: <--- wrong. wrong. wrong.

[malvolio]

Think back to Arctic (long time ago, I know). It was all about husband and wife partnerships. Had Geoff and Diana not been married, the case would never have been brought. It's about you giving money to a connected person - i.e a direct family member - not anybody else. If you partner has shares in the company, it's her income and she can do what she likes with it. Including paying her bills.

Arctic also showed that husband and wife cannot be charged with "income splitting " (hateful term). So I really wish people would stop fretting about it. As long as you're not making your four-year-old daughter or you retired granny a shareholder and spending their dividends yourself, there really is no problem.

[Wanderer]

What will affect you is the Settlements Legislation. The Arctic Systems case was eventually won by the Jones, on the grounds that: "The settlements legislation ... does not apply to companies jointly owned by married couples and civil partners and structured in this way. ". If you want that exemption, then marry the girl. Otherwise, find another way to dodge taxes.

My understanding is that you couldn't have a "settlement" with a non-connected (eg, not legally married or civil partner) so this doesn't apply. I could be completely wrong though.

If a company pays money as SALARY to someone who appears to be closely associated with the company/director then there may be a requirement to prove that they actually worked for the company rather than just doing it for a tax dodge.

For shares, these can be issued to anyone and a dividend paid. You might want to consider different classes of shares so you can vote a dividend for one class and not the other in the event that there is a change in circumstances between the shareholders.

As for the director benefiting from dividends paid to another shareholder, there is little HMRC can do if a shareholder lives in the same house as you and pays your rent, for example.

heff sounds quite happy with his relationship so should be OK but it may not work for all couples as it has the potential to go spectacularly wrong... Professional advice is definitely required here.

[NotAllThere]

My understanding is that you couldn't have a "settlement" with a non-connected (eg, not legally married or civil partner) so this doesn't apply. I could be completely wrong though.

Actually, I think it's me who's completely wrong. But either the OP's misunderstood or his accountant is wrong as well - at least in the grounds for not doing it.

[heff]

So what I've taken from this so far, is that I can split divs with her, she doesn't have to do a lick of work, and she can use her divs to pay MY rent. It's really only the rent that matters as that is my greatest expense, and the only expenditure that has my name legally attached to it. A dinner and a holiday is clearly safe for her to pay out of her divs.

The final question is, in the future, can she gift the shares back to me? If we decided our relationship wasn't going as we wished, are there any legal implications to her doing this? It doesn't sound plausible that people can just gift their shares all over the place. Tax man doesn't let you do anything for free. Having said that, my accountant says there is no problem with me gifting her shares now, even though I've been in business for about 8 months already.