appointing parents as shareholders in limited company

[PEEL]

My overall view of this is that if a realistic market value is paid for the shares, you might be ok. However, I feel HMRC would challenge this as it seems a clear way of diverting the income to avoid tax, especially given that his parents have no income.

This is what my accountant told me when I incorporated my Ltd and asked about my mum having a certain % of the shares. Either a fair value is paid (there are numerous well-established models for this) or the said parent has to provide a commerical benefit to the Ltd worthy of their share of the Ordinaries, but HMRC could still argue against it.

I didn't do it in the end because for me it would have just been an aggressive measure to avoid the extra tax.

[TheFaQQer]

Interestingly, the most recent case I could find reference to involved the gifting of shares to family members and HMRC argued there was a retained interest...and lost.

The PCG link that you include, as well as providing details of Ted (with no case reference) includes two other cases - Bird v HMRC and Buck v HMRC.

In Bird v HMRC, they had gifted the shares to their children. They lost the case.

[TheCyclingProgrammer]

In Bird v HMRC, they had gifted the shares to their children. They lost the case.

Which isn't surprising, given that settlements to children fall under an entirely different section of the law - s629, which itself was based on the old s660B.

Income Tax (Trading and Other Income) Act 2005

In this case, any settlements on relevant children of a settlor are automatically taxed on the settlor. There are no such provisions relating to "retained interest" in this situation.

So not really relevant in this particular case IMO.

I wish there was more information on the Ted case too, I'd like to read the judgement.

[Martin at NixonWilliams]

Some interesting views!

The OP states in his original post that he is funding his parents living after paying tax. To me it is clear that there is a benefit to the settlor by diverting his income as he no longer suffers the tax.

My opinion is therefore that there is a benefit to the settlor and so it would be caught.

[TheCyclingProgrammer]

The OP states in his original post that he is funding his parents living after paying tax. To me it is clear that there is a benefit to the settlor by diverting his income as he no longer suffers the tax.

It's not an unreasonable interpretation, but its just that, an interpretation.

Would you agree that if the OP had not been funding his parents living, then as long as the money went to his parents and he didn't get any of it back from them during their lifetime, that he probably would not be caught?

HMRC's HS270 form lists numerous examples of where they believe the settlements legislation would apply, including examples of where the settlor retains an interest. Unfortunately, I'm yet to find an example (or case law) that would define retained interest in this way. If anybody can point me to any, I'd be very interested.

http://www.hmrc.gov.uk/helpsheets/hs270.pdf

Nearly all the examples of retained interest that I've come across have involved some kind of arrangement for the shares to be returned to the settlor at some point in the future, have conditions attached, dividend waivers have been involved or where dividend income has been paid directly to the settlor. For anybody to be able to definitively say what constitutes retained interest beyond what has already been shown, would require HMRC to make the case and take it to court and get a judgement in their favour.

Again, all of this has to be weighed up against the likelihood of HMRC actually challenging this.

[TheFaQQer]

Which isn't surprising, given that settlements to children fall under an entirely different section of the law - s629, which itself was based on the old s660B.

Income Tax (Trading and Other Income) Act 2005

In this case, any settlements on relevant children of a settlor are automatically taxed on the settlor. There are no such provisions relating to "retained interest" in this situation.

So not really relevant in this particular case IMO.

I wish there was more information on the Ted case too, I'd like to read the judgement.

The key part of the judgement from the special commissioner is that he took Hoffmann's interpretation of whether bounty had been applied - whether the arrangements would have been entered into if the transactions had been between individuals acting at arm’s length or not.

Interestingly, the most recent case I could find reference to involved the gifting of shares to family members and HMRC argued there was a retained interest...and lost.

As I say, the PCG article you reference gives you a reference to Bird v HMRC, which involved the gifting of shares to family members and HMRC argued there was a retained interest...and won.

[northernladuk]

It's not an unreasonable interpretation, but its just that, an interpretation.

I do understand a lot of this is down to interpretation but I cannot see for one minute how this particular can be interpreted any other way.,..

I bear the cost of their living after paying high 40% tax from my pocket, so why not let them benefit directly from ltd company after 20% corporation tax.

He clearly states he wants to pass the money form his company to avoid tax. In this case he has made it absolutely black and white what he wants to do and on that admittance alone he wouldn't stand a chance.

[TheCyclingProgrammer]

The key part of the judgement from the special commissioner is that he took Hoffmann's interpretation of whether bounty had been applied - whether the arrangements would have been entered into if the transactions had been between individuals acting at arm’s length or not.

The issue of bounty is only used in determining whether or not a transaction constitutes a settlement within the scope of the legislation - it is not what determines if the settlement income is taxed on the settlor.

I don't think anybody is arguing that a gift of shares to family members would not be a bounteous arrangement. I'm not. Even in the Arctic Case, the arrangement would have been considered a settlement due to its bounteous nature if the spouse exemption had not applied.

As I say, the PCG article you reference gives you a reference to Bird v HMRC, which involved the gifting of shares to family members and HMRC argued there was a retained interest...and won.

Which involved gifting of shares to children which is explicitly legislated against in s629 (previously s660b) which I linked to in my previous post and which proved to be the deciding factor in the Bird case. There is no specific section for "family members".

So yes, definitely avoid creating a settlement on your children by giving them shares and dividends. This is most definitely a no-go area. But you can't simply extend this principle to "all family members".

[TheFaQQer]

So I would argue that if there are no dividend waivers, the shares are ordinary shares and gifted unconditionally, that dividends are paid directly to the parents, none of the money makes its way back to the OP and he derives no obvious benefits from the money, then he wouldn't be caught.

Therein lies the rub.

The obvious benefit that he is receiving from the money is that he doesn't have to pay anything out of his post-tax income.

[TheFaQQer]

Re-skimming Jones v Garnett, isn't part of the whole S660 (now Chapter 5, Part 5 of ITTOIA 2005) debate whether the settlement is a right to income?