Frequent Shareholder Changes and HMRC

[prozak]

I was under the impression setting up class B shares was like a red rag to a bull for LTD's. Allows you to syphon as much as possible away as it isn't linked to the directors earnings so maximises avoidance.

That's what I read on here anyway.

That is what I thought as well.

All the advice I had seen about income splitting with the spouse always pointed out that it was important that all shareholders were of the same class.


So any further thoughts on my original post anyone?

[Greg@CapitalCity]

I was under the impression setting up class B shares was like a red rag to a bull for LTD's.

I know. But its not.

[northernladuk]

I was under the impression setting up class B shares was like a red rag to a bull for LTD's. Allows you to syphon as much as possible away as it isn't linked to the directors earnings so maximises avoidance.

That's what I read on here anyway.

[Greg@CapitalCity]

In my mind the 80/20 split shows some willing to share the profits of the company in a reasonable manner where as 50/50 is just avoiding tax and doesn't sit right with me.

I know what you mean, but there are just so many inconsistencies with this. On divorce, his wife would get half the company. On death, she would get the whole company. But while both parties are happily married any means of sharing ownership is frowned upon by the HMRC.

[Greg@CapitalCity]

Does anyone have an opinion whether it makes any difference to HMRC whether I frequently change my share ownership structure between myself and wifey?

What's the purpose here? To pay dividends to yourself and your wife in the most tax efficient way? If so, why not just set up two classes of share, Ordinary A, and Ordinary B - both will equal voting rights, rights to capital distributions etc. Then you can decide the amount of dividends to pay against each share class with complete flexibility, and no need to chop and change shareholdings.

[prozak]

I wouldn't say I am willing to do it just yet!

I'm investigating a way to remove some additional capital from the co.

If I wasn't planning on taking 100% back (in the same financial year) then I probably would not have thought about it HMRC's view, so you are right on that point.

[northernladuk]

I understand. That is the reason why I've asked.

But then the 80/20 was for the same purpose as wifey is not working at present.

I know what you saying but I am a bit of a pedant on this one and try run my tax pretty tight. In my mind the 80/20 split shows some willing to share the profits of the company in a reasonable manner where as 50/50 is just avoiding tax and doesn't sit right with me. The fact you admit you are changing share allcoations purposely to avoid paying more tax, in my mind, is akin to painting a cross hair on yourself and phoning HMRC.

It is purely my opinion, I play safe with tax issues, I am not in a situation to use this so can't say if what I say and do would be different things and so on and so on.. It just doesn't look right to do this, let alone so quickly.

It looks to me that you know what HMRC won't like about it but are willing to do it anyway which is fair enough, you have a different attitude to risk. Loads do it so go for it.

My opinion in that case isn't really valid, just Alan's point on gifting and timings.

[prozak]

So you are saying HMRC would argue exactly what Prozac is trying to do.

Off the back of all the discussions of 75/25 v 50/50 splits are you not just exposing yourself to more risk by your 55/45 which is being changed to avoid more tax? I can't see how HMRC cannot be interested in someoen fudging their shares to avoid tax surely?

I understand. That is the reason why I've asked.

But then the 80/20 was for the same purpose as wifey is not working at present.

[prozak]

HMRC could argue that this is simple 'income shifting' and not caught by the spouse exemption, so in case that is not clear, HMRC would probably seek to ignore such an arrangement and assess the tax liability on the main shareholder.

The main shareholder at which point? 80/20?

This is my confusion here. Would they accept the 80/20 as legit and then say the 55/45 was not?

What if it remained at 55/45 for another year or two?

[prozak]

I appreciate your point of view, hence the reason I asked here.

However, if they are to do that then they could just see the initial 80/20 gift the same? Why could I not gift even more to the wifey?

Am I right in my recollection in thinking that it is a policy of Nixon Williams not to advise clients to do this anyway? - Just trying to gauge your general approach and risk averseness here not suggesting you are right or wrong, or that I don't appreciate the advice.

- If I gifted my wife 10,000 Company X - who pays dividends - shares so I could avoid the tax one year and she gifted them back the following year. What would HMRC say?

[Nixon Williams]

So you are saying HMRC would argue exactly what Prozac is trying to do.

HMRC could argue that this is simple 'income shifting' and not caught by the spouse exemption, so in case that is not clear, HMRC would probably seek to ignore such an arrangement and assess the tax liability on the main shareholder.

Whilst structuring the shareholding with a spouse can be worth looking at, we would certainly warn against swopping shareholdings around without a good commercial reason, simply wishing to avoid higher rate tax is not a good commercial reason.

Alan

[northernladuk]

HMRC may try and argue the shares that are being transferred are indeed a right to income because there is the expectation to receive the dividends if the underlying reasoning behind the transfer to ensure one or both shareholder(s) are to remain basic rate tax payer(s).

So you are saying HMRC would argue exactly what Prozac is trying to do.

Off the back of all the discussions of 75/25 v 50/50 splits are you not just exposing yourself to more risk by your 55/45 which is being changed to avoid more tax? I can't see how HMRC cannot be interested in someoen fudging their shares to avoid tax surely?

[Nixon Williams]

If you are looking to change the shareholdings in the company between yourself and your spouse more than once then you may run into problems if you were to ever be investigated by HMRC as the spousal gift exemption may not apply.

HMRC may try and argue the shares that are being transferred are indeed a right to income because there is the expectation to receive the dividends if the underlying reasoning behind the transfer to ensure one or both shareholder(s) are to remain basic rate tax payer(s).

Alan

[prozak]

Does anyone have an opinion whether it makes any difference to HMRC whether I frequently change my share ownership structure between myself and wifey?

Start of 2011 I went from 100% to 80/20 with wife. Divis paid to take me to 42475 limit in year.

This year I am considering increasing this to 55/45 and paying all divis to take me to the 42475 limit for the whole year in April.

Soon after (lets say May), I am then planning on going back to a 100% ownership for me.

What say the board?