Reply to: [Tax Planning][17/18] Company structure - spouse

[eazy]

[QUOTE=RonBW;2365595]

NO THEY DID NOT. Geoff and Diana Jones did NOT win on appeal - HMRC LOST ON APPEAL. That's a huge difference - the Jones won at EVERY stage of the legal process. To imply that that they needed to appeal the judgement to win is highly inaccurate.
QUOTE]

The above is not 100% true, the first two rounds were won by the HMRC. This case would have not got further than the special commissioners without the backing from PCG (IPSE).


Sep 2004 –HMRC special commissioners – HMRC Win

Mar 2005 –High Court – HMRC Win


The arctic systems case and settlements legislation | Tax | Library | ICAEW

[northernladuk]

Let me explain this to you. When Mick Jagger says, "I can't get no satisfaction," and millions of groupies agree with him, you don't say, "I agree with the groupies," you say, "I agree with Mick Jagger."

I'm happy to have you as one of my groupies, though, if it makes you feel better. Can't speak for TCP on the subject, though.

And thank you

[WordIsBond]

Basically I agree with TCP and WiB above.

Only them???

Let me explain this to you. When Mick Jagger says, "I can't get no satisfaction," and millions of groupies agree with him, you don't say, "I agree with the groupies," you say, "I agree with Mick Jagger."

I'm happy to have you as one of my groupies, though, if it makes you feel better. Can't speak for TCP on the subject, though.

[WordIsBond]

Furthermore, the OP is setting the company up just now and so there is no value in any of the shares that are being given to anyone - it would be difficult to argue that there has been any settlement at all, since the company has no value.

I doubt this point is relevant to the question. HMRC is certainly not likely to argue anything about the value of shares given to a spouse, whether it is a new company or an existing one with reserves of millions of pounds.

The question at hand is whether the shares are given, not to confer partial ownership, but instead are a rather transparent fiction to obscure an inappropriate (as far as tax is concerned) settlement of income. If HMRC believe that is going on they will be inclined to target it, whether the company had value at the time of the gift of shares or not.

[northernladuk]

I still bear the mental scars from when, as a fresh-faced and callow youth, I was called a buffoon by the great man. Alas, alas.

I'd give my right arm to be have only been called a buffoon by such an esteemed character and only once in such a long time. Getting through a day without something similar is an achievement for me

[Alan @ BroomeAffinity]

Damn that's a good memory...

I still bear the mental scars from when, as a fresh-faced and callow youth, I was called a buffoon by the great man. Alas, alas.

[TheCyclingProgrammer]

Aren't most of the waiver cases down to whether the company had funds to pay a dividend that could then be waived? I forget the exact details but I thought that one was something like the company needed £300 million to pay the dividend that the husband waived to pay £30k to the wife. Something like that.

That did play a part in the overall decision, however IIRC the case looked at the picture as a whole and it was determined that the regular use of waivers to effectively shift income from a higher rate tax payer to a lower rate tax payer in order to avoid tax constituted an arrangement and therefore a settlement in its own right.

I'd have to refresh my memory of the details of the case however the precise details aren't really the point here, it was more that HMRC have managed to find otherwise to attack dividend distributions using the settlements legislation without having to attack the underlying share transaction. They could do it again, especially if there's significant tax to be recouped.

[RonBW]

But as I speculated in my previous post, that's no guarantee. HMRC were able to successfully attack dividend waivers by making the case that the waivers - not the underlying share structure and gift of shares - were a separate arrangement in their own right and one that was solely a gift of income.

Aren't most of the waiver cases down to whether the company had funds to pay a dividend that could then be waived? I forget the exact details but I thought that one was something like the company needed £300 million to pay the dividend that the husband waived to pay £30k to the wife. Something like that.

[TheCyclingProgrammer]

every hearing found that was irrelevant, and that the gift of shares which were more than a right to income, between spouses was not (and could not) be a settlement.

Actually that's not what they found. It was accepted that the transactions was a bounteous arrangement and therefore met the definition of a settlement. That is not what was under dispute - what was under dispute was whether or not the income derived from that settlement should be taxed on the settlor or the recipient.

It was established eventually that the spouse exemption applied and therefore while it was still a settlement, it was taxed on the recipient.

It is of course true that the involvement of the recipient in the day to day running of the business - whilst relevant to establishing if there was a settlement (as it could be argued that if the wife/partner/family member was an active participant in the business then there probably wasn't a settlement in the first place as there isn't the element of bounty) - is not relevant to who the dividends should be taxed on. If the spouse exemption applies or the settlor does not retain an interest in the shares and related property then the income is always taxed on the recipient.

[TheCyclingProgrammer]

A few points:

The OP's situation doesn't seem that far from the judgement in Arctic - as long as the share is not just a right to income, and the share gift has been done correctly, then it would fall outside the settlements legislation.

On the face of it, you're correct. Ordinary (alphabet) share classes that rank equally don't appear to be caught by the settlements legislation as its written and on the case law we have to go on (notably Arctic).

But as I speculated in my previous post, that's no guarantee. HMRC were able to successfully attack dividend waivers by making the case that the waivers - not the underlying share structure and gift of shares - were a separate arrangement in their own right and one that was solely a gift of income.

I see no reason why they couldn't potentially make the same case against alphabet shares - the gift of shares itself might be protected by the spouse exemption but the act of specifically voting on dividends for one share class - notably to take advantage of a spouse's unused personal allowance - could be construed to be a separate arrangement and again, one that is effectively a gift of income. If HMRC chose to attack alphabet shares in this way, whilst each case would have to be judged on its own merits, I would not be surprised if they won.

It would obviously be different if the OP was giving a share in the business to a family member or to an unmarried partner (for example)

As I must have mentioned on here a million times, giving a share of your business to a family member or unmarried partner is not specifically caught by the settlements legislation - however there is an element of uncertainty because HMRC have not attacked this particular scenario and won (or lost) to my knowledge.

IMO, the circumstances in which this arrangement would be caught would potentially catch a husband/wife scenario too. The spouse exemption is not a panacea. It is still possible for a husband/wife scenario to be caught in certain circumstances and there's more to the spouse exemption than just making sure you give ordinary shares - but I'm not going to elaborate further on this because my view on this has been discussed on here many times in great detail.

Furthermore, the OP is setting the company up just now and so there is no value in any of the shares that are being given to anyone - it would be difficult to argue that there has been any settlement at all, since the company has no value. I presume that this is how some people who give shares to non-spouses (either using alphabet shares or otherwise) avoid the settlements legislation.

Its a fair point, if you can avoid a transaction being considered a settlement full stop then all other discussion of the legislation is rendered moot. I'm not sure HMRC would agree with the reasoning that gifting shares at the outset precludes it from being a settlement but I'd tend to agree with you.

However this doesn't avoid the issue I mentioned above - the underlying gift of shares might not be a settlement, or it might be a settlement that isn't caught due to the spouse exemption or for some other reason - but subsequent voting of dividends on a particular class of shares could be.

Remember a settlement doesn't have to be a gift of shares - it can be potentially any bounteous arrangement.

This is just speculation. I'm generally still of the view that the risk of attack from HMRC using the settlements legislation is low and has diminished more and more since the Arctic case (waivers cases aside). But I think the potential for making a case against alphabet shares is there and the more people that start using them the more the risk increases that HMRC will start sniffing around again.

[northernladuk]

Damn that's a good memory...

[Alan @ BroomeAffinity]

You are THEPUMA and I claim my £10.

[RonBW]

Ask as much as you want. I'm happy to admit I don't know enough about the details so you are going to have to ask someone a little smarter than me. I was only making the point about the advice on Alphabets which seemed to be against the advice of most of the accountants on here, even though it appears possible. In hindsight I should have just left it at that.

I'll give you the answer - it cannot be a settlement, whether you use alphabet shares or not. The value is zero. There cannot be a settlement. In the same way that you can give (for example) 10 class B shares to an unmarried partner where the value of the company is nothing, there is no tax to pay - nothing to do with Arctic but very much common sense.

And I'm sure that there are plenty of contractors who use alphabet shares (and non-alphabet shares) to give a stake in the company to people who would never be covered by any precedent that Artic set - if the value of the company is £100 (assuming that the company has 100 £1 shares) then the size of the settlement is so low to be meaningless.

[northernladuk]

But for the third time of asking, please explain how a gift of zero value can be considered a settlement?

Ask as much as you want. I'm happy to admit I don't know enough about the details so you are going to have to ask someone a little smarter than me. I was only making the point about the advice on Alphabets which seemed to be against the advice of most of the accountants on here, even though it appears possible. In hindsight I should have just left it at that.

[RonBW]

LOL.. I don't think you can say it's utterly incorrect

No -the bits where you showed that HMRC were wrong were correct

There isn't enough there for my simple mind to come to the conclusion that Artic stands so this one is water tight. Not nearly enough. So for that I still think it's a risk.... and a bit of a pisstake in my very flawed opinion but there you go.

Nothing is watertight - even of you look at the Arctic case, that did not (as many amateurs believe) determine the case for settlements conclusively. You have to look at the law and the precedents set and see what might apply. You also need to factor in HMRCs track record in getting this right (hint, it's non existent).

If it's as black and white as you say we might as well all do it right now.. for what reason? Business reasons or purely tax ones?.. obviously the latter.

How you structure your business is up to you - unless there is a law against it then you are free to do that as you choose. We might as well all do it now - I agree. Unless there is anything preventing it, why wouldn't you do it?

Each to their own, it's not actually been tested in court but IMO it's not a slam dunk as should be treated with care as indicated by a few other posters.

Which is kind of what I said - if it's done properly, if the share isn't just a right to income, and you want to consider this then you should take professional advice.

But for the third time of asking, please explain how a gift of zero value can be considered a settlement?