Reply to: Do those of you with shared household finances give shares to your spouse?

[TheCyclingProgrammer]

If she's done it from day one then it's pretty much irrelevant - even if somehow HMRC argued that the shares were caught by the settlements legislation, you would be taxed on the value of the gift. Which if it's done at startup is nothing.

This is wrong. Whilst somewhat of a moot point in vwdan's case due to Arctic, if an arrangement *is* caught by the settlements legislation, it's not the value of the gift you are taxed on (and there is no tax on gifts between married couples), but all derived income from that gift (i.e. the dividends) that are taxed on the settlor.

[northernladuk]

At the risk of assuming another's mantle and suggesting to search the forum, have you considered searching the forum?

A quick search finds this one from 2016, for example - https://www.contractoruk.com/forums/...to-missus.html

Might be worth asking the OP what they decided in the end.

You might have missed that the guy in that link is also the guy that started this thread.

[DeludedKitten]

My wife has a 20% shareholding and has done from day one. My understanding was that HMRC had already lost that battle when it came to married couples, and I felt my wife deserved something for putting up with the time I was piling into starting a business and also fronting the capital which let me leave my permie job.

She was never an employee until she gave up work - I know it's not completely whiter than white, but the pay is very low and I'm lucky enough that she's a management accountant by trade so I can genuinely make the case that she assists with the day to day running, book keeeping etc.

If she's done it from day one then it's pretty much irrelevant - even if somehow HMRC argued that the shares were caught by the settlements legislation, you would be taxed on the value of the gift. Which if it's done at startup is nothing.

[vwdan]

My wife has a 20% shareholding and has done from day one. My understanding was that HMRC had already lost that battle when it came to married couples, and I felt my wife deserved something for putting up with the time I was piling into starting a business and also fronting the capital which let me leave my permie job.

She was never an employee until she gave up work - I know it's not completely whiter than white, but the pay is very low and I'm lucky enough that she's a management accountant by trade so I can genuinely make the case that she assists with the day to day running, book keeeping etc.

[DeludedKitten]

At the risk of assuming another's mantle and suggesting to search the forum, have you considered searching the forum?

A quick search finds this one from 2016, for example - https://www.contractoruk.com/forums/...to-missus.html

Might be worth asking the OP what they decided in the end.

[northernladuk]

WordIsBond has a very different set up to us so has a business reason for using them. Lemme get the link.

https://www.contractoruk.com/forums/...st2603698.html

And some examples here.

Company Law Club // Alphabet shares

[d000hg]

You seem a little obsessed with my "morally upright IFA". I'm not sure why. I said that to make it clear this is not some sleazy type who typically entices their clients into dodgy loopholes that are yet to be closed, only well-established tried and tested options. e.g. I cannot imagine they'd advise people in the past to go the BN66 route, etc. I was rather surprised a fairly straight-laced, conservative advisor would be so confident this was the way to go, is all. Previously I'd ruled it out.

Out of interest, what is the "correct" use of alphabet shares?

[Iliketax]

I was never great at quoting tax legislation, but if you can be bothered, have a detailed read over the outcome of the Arctic Systems case. I believe one of the things that was critical was that they had the same share class. Therefore there couldn't really be an argument that her shares were just a right to income.

Thanks. It's been a long time since I read Jones v Garnett (and that was much more interesting that when I watched it live). They key point on the settlements legislation was that it would have been a problem if the shares were wholly or substantially a right to income. But the House of Lords said that they were not, so no problem. However, that has nothing to do with the point I'm making. Chapter 3B is new legislation (from 2003 onwards whereas this case was for 1999/2000) and works in a totally different basis.

[pscont]

Thanks for clarifying. I was wondering whether it was leak and potato or chicken and mushroom.

I was never great at quoting tax legislation, but if you can be bothered, have a detailed read over the outcome of the Arctic Systems case. I believe one of the things that was critical was that they had the same share class. Therefore there couldn't really be an argument that her shares were just a right to income.

Where you have different share classes, it adds weight to the argument that the spouse's shares are inferior in some way. Indeed I think QDOS's tax related insurance basically requires you to confirm that whilst you can have a spouse owning some shares, the rights are the same and dividends paid in line with shareholding, with no dividend waivers.

AB shares can (and must for our purpose) have same rights and entitlements as regular shares.

[Maslins]

Just to be clear, there is no actual soup involved.

Thanks for clarifying. I was wondering whether it was leak and potato or chicken and mushroom.

I was never great at quoting tax legislation, but if you can be bothered, have a detailed read over the outcome of the Arctic Systems case. I believe one of the things that was critical was that they had the same share class. Therefore there couldn't really be an argument that her shares were just a right to income.

Where you have different share classes, it adds weight to the argument that the spouse's shares are inferior in some way. Indeed I think QDOS's tax related insurance basically requires you to confirm that whilst you can have a spouse owning some shares, the rights are the same and dividends paid in line with shareholding, with no dividend waivers.

[Iliketax]

You mention employees here. I'm on a salary but isn't it a key point that many of us are directors but NOT employees?

No. That's not a distinction. For almost all the employment income tax rules a director is treated as an employee. And most directors of companies providing consultancy services are likely to be employees anyway.

So they talk about using alphabet shares to pay all employees via dividends, to avoid salary=>income tax. But my wife isn't an employee or involved in the running of the company.

That's right. But you are an employee. If the company issues your wife shares then they are almost certaintly employment-related securities (see s421B(1) and (3) ITEPA 2003) or if you transfer some of your shares to her (and use a pen to cross out "A" and add "B") they will still be ERSs. In both cases they are still linked to your employment and so you will be the one paying any employment income tax under Part 7 of ITEPA. If you really want fun, make the B shares redeemable and the tax is paid through PAYE and NIC is due too.

Further, they talk about this "soup" when many classes of share are used so everyone gets their own share class. I'm talking about one additional share class, specifically for my spouse

The guys who wrote the manual (I think Michael and Martin, but this bit could have been done by Jon and Tom) decided to put a funny name to it. Just to be clear, there is no actual soup involved. Also, when you do an example, you try to make your point by taking an extreme position. There is no point trying to illustrate something by making it finely nuanced.

as I've said I thought HMRC made special dispensation/understanding for financial arrangements between husband/wife?

You thought wrong. There are plenty of examples where tax, or potentially more tax, is due (e.g. SDLT if a mortgaged house is transferred, loss of exempt employee shareholder status, doesn't inherit ownership period for ER).

So I'm struggling to see this is the case I am discussing?

Maybe ask your morally upright IFA? Or if they don't know, perhaps a tax adviser?

A further query - why is it absolutely fine if I gift my wife some class A shares but potentially sticky for class B?

HMRC believe that the act of choosing to pay a discretionary dividend, where there is more than one classes of shares with discretionary dividend rights, artificially enhances the value of the shares that then gets the dividend. Chapter 3B taxes that artificial increase (terms and conditions apply). Paying a dividend on a single class of shares does not do so in an artificial way.

[d000hg]

Did your morally upright IFA mention HMRC's guidance on this: ERSM60030 - Employment Related Securities Manual - HMRC internal manual - GOV.UK



What HMRC says is that when you declare a dividend the value of the shares goes up. So you as the employee, not your spouse, will pay income tax on that increase in value. Then your spouse will pay tax on the dividend. So that's two lot of tax on the same thing. Now it no one is paying tax, who cares. If you were both to pay the highest rates, that's 83.1%. You'll be somewhere in between.

Now your morally upright IFA might well be right that HMRC might lose in court. They might say that all the "things done" are done for "genuine commercial purposes" (which is defined not to include anything done as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions). But equally your morally upright IFA may not know about tax. You could ask them? Maybe ask them how Chapter 3B of Part 7 ITEPA 2003 might apply if the revenue got a bee in their bonnet?

You mention employees here. I'm on a salary but isn't it a key point that many of us are directors but NOT employees?

Let's look at that page you linked (thanks by the way):

Example 3: alphabet soup
A company uses special classes of shares to pay all or most of employees’ wages as dividends. Each employee will have their own class of shares so different dividends can be paid to each. The shares have no rights other than that the employer can award dividends at his discretion.
Each dividend is acting as if it were a cash bonus specific to the employee. Each time the dividend is voted the value of the share will rise and each time the dividend is paid, the value will fall again. The accumulated rises for the year will be artificial increases in value of the shares caught by Chapter 3B - the legislation disregards the falls in value.

If there is a large number of employees the classes of shares may be designated A, B, C, etc. hence the generic description “alphabet soup”.

So they talk about using alphabet shares to pay all employees via dividends, to avoid salary=>income tax. But my wife isn't an employee or involved in the running of the company.
Further, they talk about this "soup" when many classes of share are used so everyone gets their own share class. I'm talking about one additional share class, specifically for my spouse - as I've said I thought HMRC made special dispensation/understanding for financial arrangements between husband/wife?

So I'm struggling to see this is the case I am discussing?

A further query - why is it absolutely fine if I gift my wife some class A shares but potentially sticky for class B? What is the distinction legally/HMRC-wise?
Obviously the limitation with gifting class A is that the ratio of dividends is fixed. Now presumably spouses can each year re-gift shares to obtain they ratio they want but that seems substantially more artificial, personally. I've no idea if people do that?

[Spoiler]

I've looked into alphabet shares before but was put off as they seemed a little dodgy.
<snip>
Clearly I cannot simply use faux employment to pay my wife for nothing.

Two different things here ?? Shareholding is not employment/salary.

My setup is:
I'm sole director
Me/Spouse 50% shareholders (no alphabet nonsense) = equal dividends
I take a salary
Spouse doesn't get a salary, as they are not employed by the Ltd

[Iliketax]

I was most surprised that my well-respected, morally upright IFA recommended issuing her class B shares with the advice "HMRC won't like it but married couples have the right to arrange their income efficiently, and if they took you to court they would lose".

Did your morally upright IFA mention HMRC's guidance on this: ERSM60030 - Employment Related Securities Manual - HMRC internal manual - GOV.UK

Example 3: alphabet soup
A company uses special classes of shares to pay all or most of employees’ wages as dividends. Each employee will have their own class of shares so different dividends can be paid to each. The shares have no rights other than that the employer can award dividends at his discretion.
Each dividend is acting as if it were a cash bonus specific to the employee. Each time the dividend is voted the value of the share will rise and each time the dividend is paid, the value will fall again. The accumulated rises for the year will be artificial increases in value of the shares caught by Chapter 3B - the legislation disregards the falls in value.

If there is a large number of employees the classes of shares may be designated A, B, C, etc. hence the generic description “alphabet soup”.

What HMRC says is that when you declare a dividend the value of the shares goes up. So you as the employee, not your spouse, will pay income tax on that increase in value. Then your spouse will pay tax on the dividend. So that's two lot of tax on the same thing. Now it no one is paying tax, who cares. If you were both to pay the highest rates, that's 83.1%. You'll be somewhere in between.

Now your morally upright IFA might well be right that HMRC might lose in court. They might say that all the "things done" are done for "genuine commercial purposes" (which is defined not to include anything done as part of a scheme or arrangement the main purpose (or one of the main purposes) of which is the avoidance of tax or national insurance contributions). But equally your morally upright IFA may not know about tax. You could ask them? Maybe ask them how Chapter 3B of Part 7 ITEPA 2003 might apply if the revenue got a bee in their bonnet?

And just to be clear:

1. This has absolutely noting to do with the settlements legislation.

2. If all of the shares are the same class then it doesn't apply.

And just to be unclear, you may lose ER relief with alphabet shares. The legislation in the current Finance Bill is pants, but the obvious wording is that relief is lost. HMRC are trying to squint at it to see if it is ok. My guess is that this is something that will get tweaked at the Report Stage but no one will know for sure in the next few weeks.

[Manic]

Would be fine with it except for the alphabet shares bit. I think one thing that was critical in Arctic Systems case was husband and wife had the same shares, so legally she had just as much power as he did. With A and B shares, you're making a clear distinction, so we recommend against them (bla bla except where genuine commercial reason yadda yadda).

This.

My spouse is not a director but holds 50% shares.