Income Shifting after a few years

[northernladuk]

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

True but that is a clear business transaction and cannot be argued otherwise. In the case of husband/wife there is a very good argument for gaining a tax advantage through a contrived business solution for which there is no clear need so have to act differently to avoid falling foul of rules. Can't really compare your example to a husband and wife situation.

[TheCyclingProgrammer]

As NLUK says, the starting position for any bounteous arrangement such as a gift of shares between spouses (or anybody else) is that it constitutes a settlement and the question is one of: should that settlement be taxed on the settlor or not (generally, if there is retained interest, or the spousal exemption criteria aren't met, or recipient is settlor's children or a trust that the settlor has an interest in then YES it should, otherwise NO).

However, the starting position for any genuine business transaction (i.e. made at arms length, no element of bounty), such as the example you posted Craig, or even if you sold the shares in YourCo at a reasonable market value, is that it is not a settlement in the first place and therefore settlements legislation doesn't even enter the picture and any challenge would fall at the first hurdle.

So it is a bit of a case of comparing apples to oranges.

And I think I just agreed with NLUK again.

[TheCyclingProgrammer]

Lest this thread gets drawn out into another long-winded settlements discussion, my suggestion to OP would be that he probably won't have a problem, should pick a split that he/she is comfortable with and get advice from their accountant to make sure all the paperwork is done properly (share allocations or transfer forms, updating the company register, possibly a minuted directors meeting, notifying companies house in your annual return when the time comes etc., issuing share certificates).

In addition to the advice already given (not paying dividends into joint accounts etc., making sure your wife's dividends are treated as her income and hers alone to do as she pleases with), I'd also recommend you avoid the use of dividend waivers, no matter how tempting, as they can constitute a settlement in their own right (and as they would be treated as solely a right to income, the spouse exemption won't help you here). I'm not sure to what extend HMRC have tested waivers in court, but there is some HMRC guidance on the matter here:

TSEM4225 - Dividend waiver - when Settlements legislation may apply

[ASB]

There was some mention of CGT and I think TCP said it was probably an irrelevance.

The relevant IR helpsheet is here which explains what assets are transferred at what value.

http://www.hmrc.gov.uk/helpsheets/hs281.pdf

[JoJoGabor]

Another option is to take out all the retained profit from the company before you do the share split. Remove one angle of attack from HMRC

[Wanderer]

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.

Be aware that if your fiancée has any income in the current tax year, this may make her a higher rate taxpayer and it will certainly complicate her tax affairs so get your accountant to do the calculations for you to show how much tax you will pay.

An even more aggressive route would be to close the company with an MVL and start a new one with your wife as 50% shareholder from day one.

[billridley]

Joint Bank Account

Slightly worried about this thread as my wife and I had a joint bank account prior to me starting up the company with her as a 40% shareholder. I make separate dividend payments but obviously both go into the same bank account. Should we be thinking of opening individual bank accounts next tax year? - obviously too late to do anything now regarding this tax year.
Cheers









QUOTE=Wanderer;1884331]Be aware that if your fiancée has any income in the current tax year, this may make her a higher rate taxpayer and it will certainly complicate her tax affairs so get your accountant to do the calculations for you to show how much tax you will pay.

An even more aggressive route would be to close the company with an MVL and start a new one with your wife as 50% shareholder from day one.[/QUOTE]

[Clare@InTouch]

If you're married then I wouldn't be concerned about payments into a joint bank account, just make sure you keep salary and each dividend as separate payments.

[TheCyclingProgrammer]

Slightly worried about this thread as my wife and I had a joint bank account prior to me starting up the company with her as a 40% shareholder. I make separate dividend payments but obviously both go into the same bank account. Should we be thinking of opening individual bank accounts next tax year? - obviously too late to do anything now regarding this tax year.
Cheers

I wouldn't worry too much. It could potentially be used as an argument by HMRC to try and say the spouse exemption shouldn't apply as you are "benefitting" from the dividend and some people advise avoiding joint accounts for this reason BUT...its purely speculative and there is no precedent for this. Lets be honest, its a bit of a stretch (especially if its going into the joint account to pay for joint liabilities rather than your own personal liabilities).

As Clare says, as long as you are making distinct dividend payments it shouldn't be an issue. I mean, you could pay the dividend into her account and then she could later transfer some or all of it into the joint account. So what? Lots of people arrange their finances in this way, whereby joint liabilities (bills etc.) are paid for from a joint account.

If you're still going to worry about it, then just pay her dividends directly to her own account from now on and let her decide what she wants to do with them.

If HMRC want to pursue the idea of taxing people based on how they spend and where they keep every last pound of their income, then we may as well just give up now...

[K12AN]

Could you not start a new limited company with your wife as a subscriber/shareholder?