S660 implications shortly after a share transfer has taken place

[ContrataxLtd]

I'm due to get married in the near future and have a large amount of profit (> 90k) residing in the company. Once I get married I plan to split my company shareholding with a 50/50 split. If I were to declare a dividend shortly after the share transfer has taken place (say, a 40k dividend per person less than 5 days after the transfer has taken place), are there any grounds which indicate that the transfer is a 'wholly or substantially' right to income? This is based off http://www.nixonwilliams.com/images/...20Shifting.pdf

N.B NW are my accountants, I have spoken to my accountant @ NW regarding this who said it depends on how HMRC view the timing of the share transfer, I have PCG+ membership and I've searched the forums, so I'm looking to get the opinions of others on this forum.

Based on the flow chart on page 3 of the PDF, it appears that spouses have an exemption to this rule. We are and will be living together when we get married. The money will be going into separate bank accounts, and my spouse will get ordinary shares with full voting rights.

Hi DigitalUser

You are probably safe with what you are proposing, however, I say probably because nothing seems to ever be black or white with tax law!

If I were a revenue inspector I'd be trying to argue that the transfer was 'wholly or mainly' a right to income. Yes the shares you gift will have full rights to capital upon winding up, voting rights etc. but the fact that you mention the consideration of a dividend shortly after the transfer has taken place indicates that there is a right to income.

Obviously this is something that would be hard to prove if HMRC were to investigate so the whole thing then boils down to your attitude to risk. If I were in your position I'd go ahead and make the gift (once married of course) but try and wait as long as physically possible before declaring a dividend. Make sure you have all your paperwork in order and PCG+ just to be on the safe side!

Hope this helps, I'm sure Martin or Craig from NW will be along shortly to provide their take on this too - actually Craig beat me to it!!!

Martin
Contratax Ltd

[TheCyclingProgrammer]

Case law has already established that an outright gift of shares with full voting rights and rights to capital and no other strings attached that could be construed as the settlor retaining an interest, are not a gift wholly of income so I can't see how the timing would make any difference personally.

[TheCyclingProgrammer]

Based on the info above, it's more than likely that the transaction will be caught by the settlements legislation in that it's:

1. An arrangement
2. You have a retained interest
3. It's bounteous

I would hope not, as it would no longer qualify as an outright gift and the spouse exemption would not be applicable!

On all the evidence available (existing case law, HMRCs own guidance), HMRC would only consider there to be retained interest if there were some kind of conditions attached to the gift such that the settlor/donor would be entitled to a share of the income derived from the shares or that the shares themselves would be returned to them at some point.

Any suggestion that the settlor would have retained interest for any other contrived reason (because the settlor has control of the company or is the person who controls the company's earning power, or if the recipient chooses to spend their dividend income on household bills etc.) is pure speculation and untested in court.

As I've said a million times before (because people seem to always miss the point about what an outright gift is as far as the spouse exemption is concerned), if HMRC had wanted to argue that there was retained interest in the Arctic case (as it would have then meant the spouse exemption didn't apply), they could have done, but they didn't.

[ContrataxLtd]

Case law has already established that a transfer of shares with full voting rights and rights to capital are not a gift wholly of income so I can't see how the timing would make any difference personally.

Hi TCP

Personally I don't think you can be confident in such a wide sweeping statement like that as in my opinion case law hasn't established this fully.

It's been a while since I actually read the Arctic case judgement etc. but I seem to remember that the gift in their case was made quite soon after incorporation and as such there weren't large reserves in the company, I also think it was overlooked that there was a contract in place between the company and client/agency which basically guarantees an income to the company (as much as any contract can of course).

Both these things (in my opinion) could lead the courts to have a set of different facts if a case was taken there meaning they don't have to use the precedent set by Arctic Systems i.e. If a director/shareholder made a gift to his wife of 50% of shares when there were reserves of say £100k+ this could be different enough for the courts to make a new ruling and not be bound by the Arctic Systems precedent.

Thus there could be a right to income not covered by previous case law.

Hope this helps

Martin
Contratax Ltd

[Craig@Clarity]

I would hope not, as it would no longer qualify as an outright gift and the spouse exemption would not be applicable!

Of course there's a retained interest. It maybe an indirect interest but nonetheless, it covers the second criteria.

Inter-spouse exemption is not related to "retained interest" so you shouldn't link it.

[TheCyclingProgrammer]

Of course there's a retained interest. It maybe an indirect interest but nonetheless, it covers the second criteria.

Inter-spouse exemption is not related to "retained interest" so you shouldn't link it.

I respectfully disagree.

The definition of outright gift and retained interest use almost identical wording, the only difference being that in the general case, the settlor is also treated as retaining an interest if their spouse/civil partner retains an interest (hence the need for the spouse exemption) and in the spouse exemption wording, it only applies to the settlor/donor.

The definition of retained interest:

A settlor has retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner.

TSEM4200 - Settlements legislation: settlor retains an interest

Note: the above seems pretty clear to me. Nowhere does it say "a settlor has retained an interest if they also own shares in the company that they run and are the primary earner for or because their spouse also pays the gas bill".

Additionally, HMRC provide a help sheet full of examples of where the settlor does or does not retain an interest and it seems very clear that HMRC's idea of "retained interest" is one where there are conditions attached or some kind of expectation that the shares or dividends would make their way back to the settlor.

Regarding an outright gift:

The rule that where the settlor has retained an interest in property in a settlement the income arising is treated as the settlor’s income for all tax purposes (TSEM4200) does not apply to an outright gift by one spouse or civil partner to another unless...

A gift is not an outright gift if
it is subject to conditions, or
re any circumstances in which the property, or any related property
is payable to the giver
is applicable for the benefit of the giver, or
will, or may become, so payable or applicable.

http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM4205.htm

In other words: if the gifted property is payable or applicable for the benefit of the settlor (or their wife/civil partner), the settlor retains an interest. In the case of inter-spouse transfers, if the gifted property is payable or applicable for the benefit of the giver, it is not an outright gift and the spouse exemption once again does not apply.

If what you say is true about their being retained interest in an indirect way, then strictly speaking it would never be possible for the spousal exemption to apply in the typical income splitting scenario, but we know it does apply because Arctic proved it.

[TheCyclingProgrammer]

Hi TCP

Personally I don't think you can be confident in such a wide sweeping statement like that as in my opinion case law hasn't established this fully.

Sure, nothing is ever certain, but in terms of risk I'd say its at the pretty low end of the scale. If OP has a PCG+ membership, then I'd not lose any sleep over it.

[DigitalUser]

In other words: if the gifted property is payable or applicable for the benefit of the settlor (or their wife/civil partner), the settlor retains an interest. In the case of inter-spouse transfers, if the gifted property is payable or applicable for the benefit of the giver, it is not an outright gift and the spouse exemption once does not apply.

Ok, say if you gifted a dividend to your spouse of say, 10k, and you receive 10k, and this 20k was put towards the purchase of a car which would be driven by the giver, would this be deemed as providing benefit to the giver? What about in the case of a property purchase etc?

[ContrataxLtd]

Sure, nothing is ever certain, but in terms of risk I'd say its at the pretty low end of the scale. If OP has a PCG+ membership, then I'd not lose any sleep over it.

Personally, if I were in the OP's shoes I'd do the same and also agree with you that it is pretty low risk.

However, as accountants/tax advisors we can't just say do it etc. we have to explain the possible risks involved and then it's up to the clients as to where their attitude to risk stands. I believe this is why NW have the part in their about the possible challenge by HMRC.

That said, if this went through the courts and went in HMRC's favour then I'm not sure where that would leave everyone who made a gift with large reserves in the company so even though it's low risk there is the possibility of a high tax liability if it were ever challenged!

Martin
Contratax Ltd

[TheCyclingProgrammer]

Ok, say if you gifted a dividend to your spouse of say, 10k, and you receive 10k, and this 20k was put towards the purchase of a car which would be driven by the giver, would this be deemed as providing benefit to the giver? What about in the case of a property purchase etc?

Yes. No. Maybe. There are differing opinions on this, the only thing that can be said with any certainty is that this sort of thing hasn't been challenged by HMRC to date or tested in court. But that's not to say it wouldn't in the future.

My opinion, and it is just that, is that the settlements legislation was never really intended for this sort of thing, but HMRC have chosen it as their weapon of choice to combat income splitting - largely, but not completely unsuccessfully to date, but hey. It was originally intended to cover trust scenarios but the wording of the legislation is pretty broad which is why HMRC use it.

I believe retained interest to mean a considered arrangement whereby it was always intended for dividends to be diverted back to the settlor or in the case of trusts, where the settlor is a beneficiary of the trust; I don't think retained interest has anything to do with what the recipient of the shares spends their dividends on as long as its up to them what they do with it. If this was a valid concern, then HMRC could have tried this approach in the Arctic case and started questioning what Mrs Jones spent her money on but they didn't did they? That means they either a) didn't think of it (seems unlikely) or b) knew that it wasn't a valid argument.

But that's just me. There are others who believe that paying dividends into joint accounts or using it to buy jointly owned assets etc. is a risk. You'll have to use your own judgement.