Income Shifting after a few years

[Heathmount]

Hi

Surely not another income shifting question! I've read all the posts and guides and I'm currently speaking to my accountant but I just wanted people's opinions on this scenario.

I've been running my own Ltd company for a couple of years as sole shareholder as I'm not married. As a result I have fairly high reserves in the company account. I'm getting married in a few months and was looking to do a 50:50 share split with my wife - full shares, no waivers etc. My accountant has mentioned that:

"a 50:50 share split between spouses when only one is working is acceptable. However, the facts of the Arctic case were that the split existed since incorporation when the company had no value. This is different to your situation, where you would be gifting shares of considerable value and we have to advise that the legal precedent set by this case may not apply. There are no regulations that can be referred to and it would have to be your decision."

I obviously couldn't do the split at the time of incorporation as I wasn't married. I seem to be in a bit of no-mans-land of not being able to split back then, and possibly not being able to split now because I have money in the company.

I'm having on-going conversations with my accountant but I was interested to hear people's opinions on here.

One thing that crossed my mind was to close down this company and start a new one with an even share split but something tells me this might be an even more frowned upon course of action!

Thank you for any responses.

heathmount

[TheCyclingProgrammer]

Your accountant is right that there isn't a whole lot of legal of precedent, however, despite the shares being gifted on incorporation in the Arctic case, I don't remember there being any suggestion that transferring shares later on would have made any difference from a settlements point of view. It would still be deemed a settlement (i.e. a gift with an element of bounty), as was the transaction in the Arctic case. But as long as it meets the tests for an outright gift between spouses (as established by that case - ordinary shares, full voting rights, not just a right to income, no retained interest in the shares or income by the donor), then the spouse exemption will still apply.

Strictly speaking, the shares do have more value now and if you were transferring to a non-spouse - all settlements issues aside - it would potentially give rise to a CGT charge but as the transfer would be between spouses there are no CGT implications either AFAIK.

Your accountant is being cautious but lots of people do this, particularly spouses, and HMRC have showed little to no sign of challenging these arrangements in recent years. Arctic was years ago.

Congratulations on getting married.

[Jessica@WhiteFieldTax]

If you company is a standard ish PSC then I would argue it has little value other than the cash on the balance sheet.

The only other "asset" is your brain, and you can withdraw that at any time.

Personally, unless the balance sheet has a lot of unspent cash, I wouldn't fret too much.

Others views may differ.

[Sausage Surprise]

Just do it. Everyone else does.

[cojak]

Not everyone.

[northernladuk]

Just do it. Everyone else does.

Unfortunately this is all I can be bothered adding to this thread but just think about two things. Firstly think about a different split between 60/40 and 75/25. This has been suggested by a number of accountants on here and also around the web that I have seen. I admit for everyone that says this there are an equal number that say 50/50 is fine. There is no law or precedence for it, shareholding has no basis on the amount of work done so it shouldn't really matter but I just think it feels better and if it makes little difference to the amount brought out it just seems like a better business setup than giving up half. TCP will be along in a minute to prove that there is zero justification but to me it just looks better.

Second is don't pay it in to a shared account and try to avoid it all coming back to you via transfers and whatever. If you gift shares to your wife and she gets the money then it is hers. Paid in to shared account that it becomes pretty obvious it is nothing more than a tax dodge. Personally I would say if you are getting in to an area that splits many of us at least do it properly.

[Craig at Nixon Williams]

Just because the precedent set by another case doesn’t cover your situation, it doesn’t mean that it will necessarily cause you a problem – it just means that if you did get taken through the courts by HMRC then you couldn’t rely on this particular precedent as your circumstances are different.

Craig

[TheCyclingProgrammer]

TCP will be along in a minute to prove that there is zero justification but to me it just looks better.

I'm not sure whether there is much justification for it (50/50 didn't help HMRC in the Arctic case), but my partner and I also have 75/25 split for most of the reasons you outlined and if we had been married when we did the split I probably would have done the same thing even if it wasn't necessarily the most tax efficient.

In other words, I agree with you.

[northernladuk]

I'm not sure whether there is much justification for it (50/50 didn't help HMRC in the Arctic case), but my partner and I also have 75/25 split for most of the reasons you outlined and if we had been married when we did the split I probably would have done the same thing even if it wasn't necessarily the most tax efficient.

In other words, I agree with you.

Mods!!! TCP has been hacked!!

[Craig at Nixon Williams]

OK…I’ll be the one to play devil’s advocate then…

If you hold some shares in a FTSE 100 company, your shareholding isn’t in any way related to the amount of work contributed to the company, it isn’t even related to the amount of capital contributed to the company (unless you were the first subscriber top that particular share). Holding shares is not like paying a salary to a spouse (where you do need commercial justification for claiming the tax relief); you just need to comply with the tax legislation relating to such transfers.

Limiting the amount of shares that you transfer isn’t going to make HMRC less likely to look into you; it simply reduces your exposure to additional tax if HMRC did successfully apply the settlements legislation to your circumstances. Of course, if you don’t arrange your affairs in this way at all (i.e. you don’t give any shares to a spouse) then HMRC will have no reason to try and apply the settlements legislation at all.

Craig