Reply to: Is My Accountant Being Aggressive re: Income Splitting Legislation?

[WordIsBond]

Firstly if the kids spouses never become higher rate tax payers then having the shares is fine. Otherwise they have an additional personal tax liability.

Secondly some employers do ask you to list the shares you own and then can make you sell them if there is a possibility of a conflict of interest between their business and the shares you own.

Thanks for that. Seems easy to resolve at the time, they can just sell or gift back the shares to their spouse if an employer insists. Likewise if efficient tax planning indicates that would be better.

But it's helpful to be aware of these things, and I'll mention it to them.

[WordIsBond]

I suppose the difference would be if your children gave half of their shares to their spouse, that would be up to them and any tax implications would be on them (but bear in mind, if your children did this it would very likely be seen as a settlement AND the spouse exemption may not apply as it would be seen as purely a gift of a right to income unless the shares were ranked equally with the ordinary shares).

Interesting. Perhaps that's why he recommended we do this upfront rather than giving them to my kids initially. I'm sure that's why he recommended making them voting shares and no restrictions.

I don't think you will have any issue with giving shares to your children in this case. As I said, it wouldn't be seen as a settlement as its just a family business in which they play an important role - that's not what settlements are all about. Giving the shares to their spouses may not cause an issue either but I think its potentially a more risky (or "aggressive") approach.

Maybe I should train the spouses and put them to work, too.

Good to know where the danger point lies.

As others have said, your children could set up their own standalone businesses and have more flexibility over how they handle their income, including splitting the share of their own business with their spouses, without any hassle.

This may make sense later. As of today, for various reasons not all of which I've mentioned here, it doesn't. But if the point comes where it makes sense, that does seem more straightforward and possibly less risky to me.

Overall, my personal view is that the risk of an investigation from a settlements perspective is relatively low, but it does exist.

Thank you for your well-thought out replies.

[SueEllen]

Firstly if the kids spouses never become higher rate tax payers then having the shares is fine. Otherwise they have an additional personal tax liability.

Secondly some employers do ask you to list the shares you own and then can make you sell them if there is a possibility of a conflict of interest between their business and the shares you own.

[TheCyclingProgrammer]

Well, I could just give the shares to my kids, but they'll each immediately give half to their spouse anyway, so it's hard for me to see what difference it makes.

I suppose the difference would be if your children gave half of their shares to their spouse, that would be up to them and any tax implications would be on them (but bear in mind, if your children did this it would very likely be seen as a settlement AND the spouse exemption may not apply as it would be seen as purely a gift of a right to income unless the shares were ranked equally with the ordinary shares).

I don't think you will have any issue with giving shares to your children in this case. As I said, it wouldn't be seen as a settlement as its just a family business in which they play an important role - that's not what settlements are all about. Giving the shares to their spouses may not cause an issue either but I think its potentially a more risky (or "aggressive") approach.

As others have said, your children could set up their own standalone businesses and have more flexibility over how they handle their income, including splitting the share of their own business with their spouses, without any hassle.

Overall, my personal view is that the risk of an investigation from a settlements perspective is relatively low, but it does exist.

[WordIsBond]

If you are worrying about trusting your accountant, that doesn't necessarily bode well for the future. How did you find them? Did someone recommend them - and if so, do you trust their judgement?

Good question. I trust the person who made the recommendation on many things. And I'm quite confident in the competence of the accountant. But I'm not sure how his view of risk re: tax matches mine. I trust him to be a good accountant, but I'm still assessing how far I trust him to be MY accountant. And this company structure thing seemed to me a good test case for analysing that question.

In general, I don't trust anyone very far until they've built up a good track record with ME. A little self-centred, maybe, but that's the way I am. But I do give people a chance to build that trust.

Is this going to be an on-going thing? What happens when the contracts end? Will they find more work - and if so, how? Are you / they working through an agency or direct with clients?

Mostly answered above in a response to NLUK. No agency, no need for one. I'm very fortunate.

What happens when Kid 2 does more work than Kid 1? If you are going to structure it like this and pay dividends, then how will that work?

That is a very good question. It's not just "more work" but more value. Kid 1 can do things Kid 2 can't. I can bill the work Kid 1 does at a much higher rate. But that could change over several years. Will have to discuss with accountant. Thanks for bringing this up, it isn't a question for now or next year, but it is something we may have to address.

If you are intent on doing this, I would consider:

Class A shares x 2 - 1 for you, 1 for wife. These are the only voting shares.
Class B shares x 2 - 1 for kid 1, 1 for their spouse
Class C shares x 2 - 1 for kid 2, 1 for their spouse

That way, the board (you and your wife) can dictate what level of dividends to pay out for each class of share and can make sure it's in the right kind of proportions - no chance that kid 2 does more work, but kid 1 gets paid more.

I didn't discuss this structure with accountant. From what I've read, I wonder if he didn't recommend that because the more classes you have, the more scrutiny you might generate. Or because it would look like a Managed Service Company.

He did note that his recommendation kept control firmly with my wife and me. That could be handled in your structure by increasing the number of A shares.

By the way, I'm not "intent on doing this." If it seems I'm arguing for it, that may be because I'm not convinced that some of the arguments raised against it here have been sound.

I know it's not quite the same thing, but I know a consultancy that did it this way when they started out - 4x class A shares (1 each) then a class B, C, D, E one of each for each of the founders.

Seems to me that would be much more aggressive (and likely to be investigated) than what my accountant proposed.

IIRC, there is a specific reference to giving shares to children in the legislation, but I may be wrong.

There is, I've read it. It's not 100% clear, though. If you are giving them shares because they are your (adult) children, it's fine. If you are giving them shares because they are employees, it is treated like shares to any other employee. In this case, since they are actually part of the business and receiving founders' shares, I don't think there's an issue.

No idea whether paying a salary helps if HMRC start questioning your dividends. It does mean that if they investigated and won that there's less tax to pay because you've already paid it.

I read somewhere from a former tax man that one of the things that can flag someone up for investigation is a very low expense to revenue ratio. If you don't have any expenses and all the money coming in is profit / dividend, that tends to make them think you are a disguised employee -- real businesses have expenses, after all. I was thinking that paying out £50-60K a year in salaries, maybe 1/3 of revenue, could help prevent an investigation in the first place. If I thought it made a difference, I could even pay myself a "real" salary of £30K. It would cost some in taxes and force me to retain some funds in the company to avoid higher tax rate, but I could do that if I thought it really mattered.

Thanks for the substantive response and especially the good question about future shifts in value among the kids. Who knows, they might even be more valuable than me someday when the old man's brain starts to decay. I don't think we thought that through well enough.

[WordIsBond]

WHS

I don't know what the OP kids' spouses do but giving them shares or even embroiling them in the family business could have negative financial and employment implications for them.

Please clarify. How could owning shares in a family business have negative financial and employment implications for someone? Will potential employers ask if they own shares and turn them down if they do? Isn't their liability limited to £1 per share?

I don't understand this at all. I understand how it can be difficult to resolve in the case of a nasty split, but I don't see how it in any way endangers or complicates things for the spouses. Can you give me some examples of things we're overlooking here? My kids intended this to be a nice gift for their spouses, not a burden.

[WordIsBond]

The exceptions are spouses, but the spouse exemption will usually apply, and minor children. A settlement to a minor child will always be taxed on the settlor parent.

However this is all a moot point if there is no settlement in the first place. Shares allocated to an active partner in the business are not a settlement, presuming such an arrangement would be made to another unconnected party at arms length (ie normal business).

Thanks for this clarification. Since the B shares are being allocated based on the anticipated amount of effort / value to the company, I don't have any concern about arguing I would offer the same to an unconnected party. And these are not minor children.

(An unconnected party might not love the deal because the A shares give my wife and me control, so there would have to be a large measure of trust on their part. But I wouldn't hesitate to offer it to someone actively involved and bringing in revenue.)

I'd echo the concerns about involving the children's spouses though. Makes things more complicated than necessary.

Well, I could just give the shares to my kids, but they'll each immediately give half to their spouse anyway, so it's hard for me to see what difference it makes.

The whole discussion of spouse's shares is kind of off-base here, it seems to me. Partly my fault -- I should have said up front that my kids wanted their spouses to get half of their shares. The only way I could prevent it is by not giving any shares to the kids or by only giving one share -- which wouldn't be consistent with allocating shares to participants based on effort and value.

[TheCyclingProgrammer]

From what I remember of the settlements legislation (and it's been a while since I waded through it), there is a big difference though.

If you give your shares to a complete stranger, then there's no chance of a settlement. If you give your shares to family, then there can be.

You need to wait until TCP expresses his opinion in this thread though.

Giving shares to a stranger can still potentially be a settlement (eg strings attached) but I'd less likely to be. The same applies to family members - no real difference.

The exceptions are spouses, but the spouse exemption will usually apply, and minor children. A settlement to a minor child will always be taxed on the settlor parent.

However this is all a moot point if there is no settlement in the first place. Shares allocated to an active partner in the business are not a settlement, presuming such an arrangement would be made to another unconnected party at arms length (ie normal business).

I'd echo the concerns about involving the children's spouses though. Makes things more complicated than necessary.

[northernladuk]

Just to answer the OPs question this likes like 9 or 10 on the scale to me.

Are you not trying to use class B shares in exactly the way you are going to get investigated? As a flexible tool to avoid as much tax as possible for no real business reason?

[TheFaQQer]

My sense is that if it is ok to give shares to my kids it is ok to give them to their spouses, and it is perfectly ok to give shares to my kids.

From what I remember of the settlements legislation (and it's been a while since I waded through it), there is a big difference though.

If you give your shares to a complete stranger, then there's no chance of a settlement. If you give your shares to family, then there can be.

You need to wait until TCP expresses his opinion in this thread though.

[TheFaQQer]

WHS

I don't know what the OP kids' spouses do but giving them shares or even embroiling them in the family business could have negative financial and employment implications for them.

And it's all very well considering how well you trust your partner - how well do you trust the spouse of your children to be giving them a stake in the business?

I wouldn't be doing it.

[TheFaQQer]

I've read a lot (here and elsewhere) on income splitting / wife as shareholder and/or director. AND, I've talked to my accountant. But I've only recently become a consultant, and I don't have a long-term relationship with an accountant, so I don't yet know how much I trust the guy I'm using.

If you are worrying about trusting your accountant, that doesn't necessarily bode well for the future. How did you find them? Did someone recommend them - and if so, do you trust their judgement?

Background: I've been happily married for several decades, and trust my wife completely (my accountant found a diplomatic way to ask about this before advising, which I see as a plus for him). I have two kids working for me doing billable work for clients (and a third doing a little bit of non-billable work on a project I've got going). My consulting work is bringing in a lot more than my kids' work. My kids want to be paid salaries to have salary history for when they do buy a house. (I know contractors can get mortgages, but it isn't always easy.)

Is this going to be an on-going thing? What happens when the contracts end? Will they find more work - and if so, how? Are you / they working through an agency or direct with clients?

Recommended company structure:
Two classes of shares, with equal voting rights. Class A (more than 80% of the shares) is split evenly with my wife. Class B is divided proportionally based on income being brought into the company. Each of us (me and my kids) divide our Class B shares equally with our spouse. My wife and I each get 5 Class B shares, Offspring #1 & spouse each have three, and Offspring #2 & spouse each have two. (No spouses have more than £3K other income.)

What happens when Kid 2 does more work than Kid 1? If you are going to structure it like this and pay dividends, then how will that work?

If you are intent on doing this, I would consider:

Class A shares x 2 - 1 for you, 1 for wife. These are the only voting shares.
Class B shares x 2 - 1 for kid 1, 1 for their spouse
Class C shares x 2 - 1 for kid 2, 1 for their spouse

That way, the board (you and your wife) can dictate what level of dividends to pay out for each class of share and can make sure it's in the right kind of proportions - no chance that kid 2 does more work, but kid 1 gets paid more.

I know it's not quite the same thing, but I know a consultancy that did it this way when they started out - 4x class A shares (1 each) then a class B, C, D, E one of each for each of the founders.

My current understanding:
1. Splitting shares equally between my wife and I is entirely in the clear under current legislation.

Correct

2. Giving shares to my kids and their spouses should be in the clear as well.

IIRC, there is a specific reference to giving shares to children in the legislation, but I may be wrong.

3. Paying salaries to my kids is helpful because it helps to say to HMRC, "This is a normal family business," and reduces risk of investigation, etc.

No idea whether paying a salary helps if HMRC start questioning your dividends. It does mean that if they investigated and won that there's less tax to pay because you've already paid it.

4. Having two classes of shares IS aggressive and could draw unwelcome attention from HMRC.

Don't know

5. Not sure about paying my wife £8K -- does her position as director (and the responsibilities and potential liability that entails) justify it? This seems aggressive to me, but I don't know enough.

Don't know

[SueEllen]

I just don't get the spouses bit. Golden rule tends not to be mix money and family but in this case you've got it sorted but spouses as well? Maybe it's just me but that's too tenuous when my business is concerned. Give them to your kids and let them sort it out as they want. It just looks highly suspect spreading it so thin and adds to risks of splits and divisions which you don't need to do.... Unless they are just tax mules to keep everyone under the threshold............

Anyway, looks like you've done your homework so keep us updated. I'd be interested to see what the outcome of the alphabet shares carry-on is. I'd certainly be taking a second professional opinion on that.

WHS

I don't know what the OP kids' spouses do but giving them shares or even embroiling them in the family business could have negative financial and employment implications for them.

[northernladuk]

I just don't get the spouses bit. Golden rule tends not to be mix money and family but in this case you've got it sorted but spouses as well? Maybe it's just me but that's too tenuous when my business is concerned. Give them to your kids and let them sort it out as they want. It just looks highly suspect spreading it so thin and adds to risks of splits and divisions which you don't need to do.... Unless they are just tax mules to keep everyone under the threshold............

Anyway, looks like you've done your homework so keep us updated. I'd be interested to see what the outcome of the alphabet shares carry-on is. I'd certainly be taking a second professional opinion on that.

[WordIsBond]

Do you actually earn enough from your contact to actually make this all actually worth it??

Giving shares to you kids spouses.. Whatever class... Why would you do this?
I'd agree with point 4 and 5 re different class shares and wage for wife.

If I was the taxman and saw that horrible mess I'd definitely be over for a closer look. Are there no better options for your kids? Contract direct with their own set ups? Have you got contracts of employment set up with everyone?

Is this gig going to come to an end in then near future and what are the chances of getting this setup at another client. Changing share structures too regularly is also going ton attract unwarranted attention. Setting up a load of class B shares and then pulling them not so long after looks a bit suss for example.

Lot of questions, I'll try to cover the bases.

Re: making enough, continuing work.... Current contracts total between £80-90K over six months. Have already turned down one contract that would pay more because we were committed -- they said they'd hold it until I'm free, but I don't know if they will. Given my reputation in our niche industry, I'll have all the work I can handle for as long as I want with plenty of opportunities to take on work I can pass on to my two kids. Within a year or two will be billing for work done by the third as well (more training needed first).

Re: kids setting up on their own... They couldn't possibly do as well completely on their own. The industry will pay them more if I'm on the contract and supervising them. That would also bring IR45 into play. Maybe in a few years as their knowledge, experience, and reputation grows. Huge factor for me in going independent was to be able to set up the kids and get them really entrenched with a reputation in the industry.

Re: shares to spouses.... Our view of family / joint ownership in marriage might not be in line with everyone here. Let's leave it as I'm willing to give the shares. My question is whether my accountant is aggressive on the tax ramifications in saying this is fine. My sense is that if it is ok to give shares to my kids it is ok to give them to their spouses, and it is perfectly ok to give shares to my kids. The only thing risky here is the different classes, and that is perhaps somewhat mitigated by the fact that I also hold B shares.

Re: horrible mess.... Maybe it looks like a horrible mess because you are a sole independent contractor and I'm running a family consulting business? Probably few people here like me. Maybe I'm asking this question on the wrong forum, though I'm not sure on which forum I should ask it....