Optimal Split for Spouse shareholding

[wiseguy]

Hi,
It's quite fascinating to read all the responses here. I am in a similar situation in that I am in the 40% tax bracket this year and my wife is not. I have been advised by accountant to split the shareholder split to give my wife 100% of shareholding and to split it back to 50:50 from next tax year. It's a completely different advise than what I am seeing here.

[Wanderer]

So whats a good commercial reason?

As captainham says, avoiding putting one of the shareholders earnings into the higher rate tax bracket is not such a good reason. Mitigating circumstances may be present if the money was retained in the company to fund future expansion of the company.

Something Jessica@WhiteFieldTax might be able to offer an opinion on for us:

In the context of a husband and wife who are the only shareholders in a close company, is having A and B class shares just as bad as dividend waivers in the eyes of HMRC or is this somehow more acceptable.

The thing that I find difficult is that most of this is a grey area and we keep hearing that HMRC "don't like" certain trading structures. It's often difficult to know what's actually acceptable and what's not.... There is always a suspicion that people like MPs and big businesses with hot shot accountants are free to exploit the system in this way and HMRC would shy away from clamping down on them whereas the pleb on the street might not be treated so leniently.

[lithium147]

As captainham says, avoiding putting one of the shareholders earnings into the higher rate tax bracket is not such a good reason. Mitigating circumstances may be present if the money was retained in the company to fund future expansion of the company.

This still doesn't make sense to me. Why not just declare a smaller dividend if you want to retain funds in the company?

[northernladuk]

This still doesn't make sense to me. Why not just declare a smaller dividend if you want to retain funds in the company?

The idea is if you have 50/50 split and your wife suddenly starts working, giving the the 50% she is due will push her in to the next tax bracket so people want to waive a dividend for her to keep her below but still pay the husband the full amount as he hasn't reached his threshold. If you pay a lesser dividend to accommodate the wifes position the husband is missing out.

You do remember if it is 50/50 you must always give 50/50 dividends don't you?

Waiving dividends and class B type shares add a flexibility to allow you to say 1p under the tax bracket which quite obviously is used to avoid tax hence HMRC don't like it. Can't blame them really can you.

[northernladuk]

As captainham says, avoiding putting one of the shareholders earnings into the higher rate tax bracket is not such a good reason. Mitigating circumstances may be present if the money was retained in the company to fund future expansion of the company.

But not in the majority of PSC cases so there isn't really a good reason for us.

In the context of a husband and wife who are the only shareholders in a close company, is having A and B class shares just as bad as dividend waivers in the eyes of HMRC or is this somehow more acceptable.

Just as unacceptable.Using class B you can give any amount of money per divi so keeping yourself 1p under the tax so again using it as a flexible way to avoid tax.

The thing that I find difficult is that most of this is a grey area and we keep hearing that HMRC "don't like" certain trading structures. It's often difficult to know what's actually acceptable and what's not.... There is always a suspicion that people like MPs and big businesses with hot shot accountants are free to exploit the system in this way and HMRC would shy away from clamping down on them whereas the pleb on the street might not be treated so leniently.

Firstly the MP's are a shower of tulip agreed but we simply can't go comparing our situation with theirs. We have to deal with that is on our plate and that only. Shifting the level of divi paid for no other reason than to keep yourself under the tax bracket is clearly something that ishouldnt stick. I am surprised husband and wife shareholdings is blatant avoidance but is allowed as in other areas it is acceptable to have the wife part of the business so justifiable. It is just HMRC don't have the time, effort or inclination to fix process that works for most situations but we manipulate. Because we manipulate loopholes that are incredibly difficult to close it will never be black and white. Wanting to give your wife dividends to avoid tax should be pretty black and white though...... but it appears not.

[Jessica@WhiteFieldTax]

As captainham says, avoiding putting one of the shareholders earnings into the higher rate tax bracket is not such a good reason. Mitigating circumstances may be present if the money was retained in the company to fund future expansion of the company.

Something Jessica@WhiteFieldTax might be able to offer an opinion on for us:

In the context of a husband and wife who are the only shareholders in a close company, is having A and B class shares just as bad as dividend waivers in the eyes of HMRC or is this somehow more acceptable.

The thing that I find difficult is that most of this is a grey area and we keep hearing that HMRC "don't like" certain trading structures. It's often difficult to know what's actually acceptable and what's not.... There is always a suspicion that people like MPs and big businesses with hot shot accountants are free to exploit the system in this way and HMRC would shy away from clamping down on them whereas the pleb on the street might not be treated so leniently.

A / B split for H&W? Personally I would be uneasy about that unless there was a commerical reason, eg regulated business and need to control voting. Otherwise it feels slightly too pushy for me.

That said, it's personal opinion only, and in the right circumstances - sorry that phrase again - I would give it as a option to a client, albeit with a health warning. Young v pearce failed on "right to income" from preference shares, so ordinary As and Bs are perceived safe: my unease comes from the scenario beign too close to Arctic Systems, despite that being lost and not legislated.

Re Dividend Waivers, I've never known either from cases I've been involved with nor from wider professional reading, a point coming up on justifying a dividend waiver. In fact it would seem to me there is inherently no justification for them, it's an apparently gratious act by the shareholder, and as there is no consideration it may well benefit from being under deed (in practice letter suffices).

However where problems can arise, and HMRC will take the settlement issue, is if the level of dividend and waiver is such that the full dividend, if it hasn't been waived, exceeded retained profits.

A lot of this comes down to comfort levels: different accountants and clients have differing comfort levels, however that shouldn't stop the possibilities being discussed, even if they are discounted by client or caveatted by advisor.

[lithium147]

However where problems can arise, and HMRC will take the settlement issue, is if the level of dividend and waiver is such that the full dividend, if it hasn't been waived, exceeded retained profits.

Can't one waive a dividend that doesn't exceed retained profits. Then later on, post a dividend (that is not waived) for the remaining profits? Thereby achieving the same result..

If there are numerous H&W companies using dividend waivers, its only a matter of time before we see a court case arise on this a matter. At which time, we will finally have some practical guidance on what is appropriate.

[Greg@CapitalCity]

In the context of a husband and wife who are the only shareholders in a close company, is having A and B class shares just as bad as dividend waivers in the eyes of HMRC or is this somehow more acceptable.

The thing that I find difficult is that most of this is a grey area and we keep hearing that HMRC "don't like" certain trading structures. It's often difficult to know what's actually acceptable and what's not.... There is always a suspicion that people like MPs and big businesses with hot shot accountants are free to exploit the system in this way and HMRC would shy away from clamping down on them whereas the pleb on the street might not be treated so leniently.

I think it really depends on the person from the HMRC doing the inspection. The use of dividend waivers, and A/B shares, when used to split income between spouses may attract the attention of the HMRC, but so long as these are done correctly then it makes it difficult for the HMRC to attack. The main issue here is the HMRC have never successfully won a case in this area (where these arrangements have been done correctly) and your average contractor accountant does not want to be person the HMRC decides to have a crack at. Everyone has different perceptions of risk and although it sounds odd, contractors accountants are just people too with their own perceptions of risk. Its clear that when either of these arrangements are done for balancing income between spouses that the HMRC don't like it. Its also clear that when done correctly, the HMRC to date have not won support for their position. To be fair I think unless there is a legislation change, or unless the government approach to taxing families changes (in a number of countries income splitting is the default tax treatment), then there will remain a difference in opinion regarding what the HMRC thinks is 'acceptable', and what a small business thinks is 'acceptable'.

[Jessica@WhiteFieldTax]

although it sounds odd, contractors accountants are just people too

Allededgly. I'm sure some of my clients think I have a heart of stone though

Seriously, good points Greg

[prozak]

Forgetting waivers for a minute.

Does anyone have proof that a change in shareholding percentages (year to year or whenver) matter to HMRC? or as implied is a red flag to HMRC?

I can't see how it matters. Shareholders change their holdings all the time.

HMRC would have had to start some sort of investigation already to even notice.