Reply to: Income Splitting with Spouse....

[Danielsjdaccountancy]

I was on a PCG course recently and an ex-HMRC inspector was there also. He said they have never liked income shifting and never will so we should always be careful with advice around this matter.
As it is a case by case basis there is still nothing to stop them choosing to take on a case around this matter.

[Clare@InTouch]

You say "once upon a time", are you implying that S660a is history now?

No, just that I can't find the actual article on the HMRC website now!

I've seen income shifting mentioned again recently by the OTS, so I think it would be wrong to assume it's totally dead and buried. The problem with the old consultations is that they couldn't find a workable solution, and what they proposed was ludicrous. That's not to say they've stopped thinking about it though.

Family business income shifting tax proposals could be revived

[Wanderer]

Once upon a time HMRC’s guide “Settlements Legislation for the Small Business Advisor” listed some of the factors that may lead to an investigation under s660a...

You say "once upon a time", are you implying that S660a is history now?

Specifically, my understanding is that the Arctic Systems case found that S660a did NOT apply when a husband gave a gift of ordinary shares (eg, those which carried voting rights, rather than just a simple right to income) to his wife. The government then announced in December 2007 that they would change the law but crucially, they never did so HMRC is left with the precedent set by Arctic Systems which means that income splitting using ordinary shares between married partners is OK.

Or is this another grey area that people don't want to make a comment "on the record" about.

[prozak]

ahhh there you go...

I sometimes wonder whether i make this stuff up.... but in this case I guess I didn't... sort of

[Clare@InTouch]

Close, I think it was that "ordinary shares" came with voting rights etc so they weren't simply a "gift of income" therefore outside SC60

Agreed. Once upon a time HMRC’s guide “Settlements Legislation for the Small Business Advisor” listed some of the factors that may lead to an investigation under s660a:

• Main earner drawing a low salary which leaves more profit available for dividends;
• Disproportionate return on investment – a £1 share giving a £60,000 dividend;
• Share classes enabling dividends to be paid to shareholders who pay less tax;
• Dividend waivers being used by higher rate taxpayers.


Dividend waivers are especially an issue if the company would not have enough profit to pay a full dividend to each shareholder. For example you have two shareholders holding 50% each and a profit of £50,000, and pay £30,000 to shareholder A but nothing to shareholder B because they waived their right to it (and it just so happens that if they'd taken it they would have been subject to higher rate tax).

I can't find the llink to this on the HMRC site at the moment, but if you google the title of the guidance it still appears in PDF.

[Clare@InTouch]

I can't reacall where... but I think I read something about maintaining 75% control would ensure the majority shareholder has absolute mandate on anything they choose to do....

my wife now has 20%.... works well... she also has student loan hence the small shareholding... I refuse to pay back her student loan!

75% gives you the ability to pass an extraordinary resolution or a special resolution, things you would use when you want to wind up the company or change the name for example.

It's worth noting that minority shareholders do have some protection though: Shareholder Rights - Shareholder Disputes

[Wanderer]

IIRC it's important that all shares issued in this way have to be the same, ordinary shares only no preference shares, otherwise it still gets caught by SC60. In the Artic Systems(?) case one of the key factors was that all shareholders held the same sort of shares with the same rights.

Close, I think it was that "ordinary shares" came with voting rights etc so they weren't simply a "gift of income" therefore outside SC60

[DaveB]

You are correct, you do not have to pay her a salary also. If you think about the big companies such as Shell and BP etc, they have lots of shareholders who do not recieve salaries.

Do speak to your accountant and be mindful of the income shifting legislation.

You can also split the shares between A shares and B shares with B shares having no voting rights as to how the company is run.

By doing it this way you wouldn't have to pay the B shares a dividend as frequently as the A shares so you could award yourself a dividend monthly and pay your wife a dividend as you see fit (maybe once or twice a year).

IIRC it's important that all shares issued in this way have to be the same, ordinary shares only no preference shares, otherwise it still gets caught by SC60. In the Artic Systems(?) case one of the key factors was that all shareholders held the same sort of shares with the same rights.

[prozak]

Keeping an extra 1% gives you control over the company, which would come in exceptionally handy if you ever get divorced.

I can't reacall where... but I think I read something about maintaining 75% control would ensure the majority shareholder has absolute mandate on anything they choose to do....

my wife now has 20%.... works well... she also has student loan hence the small shareholding... I refuse to pay back her student loan!

[Steven@Parasol]

If I make my wife a shareholder of the company, I assume there is no obligation to pay her a salary also? She already earns just above her personal allowance so don't see that's it's worth the extra hassle of paperwork and calculations involved with paying a salary.

Is there anything I should consider in going for the "dividend only" option?

Many thanks

_smudger_

You are correct, you do not have to pay her a salary also. If you think about the big companies such as Shell and BP etc, they have lots of shareholders who do not recieve salaries.

Do speak to your accountant and be mindful of the income shifting legislation.

You can also split the shares between A shares and B shares with B shares having no voting rights as to how the company is run.

By doing it this way you wouldn't have to pay the B shares a dividend as frequently as the A shares so you could award yourself a dividend monthly and pay your wife a dividend as you see fit (maybe once or twice a year).

[smudger]

If I make my wife a shareholder of the company, I assume there is no obligation to pay her a salary also? She already earns just above her personal allowance so don't see that's it's worth the extra hassle of paperwork and calculations involved with paying a salary.

Is there anything I should consider in going for the "dividend only" option?

Many thanks

_smudger_

[Clare@InTouch]

No; did I miss an essential piece of business education?

Keeping an extra 1% gives you control over the company, which would come in exceptionally handy if you ever get divorced.

[monkeyrhythm]

Did you never watch Howard's Way?!

No; did I miss an essential piece of business education?

[THEPUMA]

Why would you do 51/49 as opposed to 50/50? what does the additional (controlling interest) share mean in reality?

I'm just about to gift some (more) shares to my wife and I was going to leave us with a 50/50 split until I read your post...

Did you never watch Howard's Way?!

[monkeyrhythm]

How you split isn't going to make you any more or less visible. Though I wouldn't do more than 51/49. If they decide to do an enquiry then whether it is 75/25 or 50/50 isn't going to make any difference to the outcome or to the potential of them attacking the structure in my view.

Why would you do 51/49 as opposed to 50/50? what does the additional (controlling interest) share mean in reality?

I'm just about to gift some (more) shares to my wife and I was going to leave us with a 50/50 split until I read your post...