Reply to: Advice on making my wife a shareholder of my Ltd Company?

[Clare@InTouch]

It is a complicated area, sometimes a few quid to an accountant is worthwhile. Key points:

1) The Arctic systems case went all the way to the HoL and the judgement was limited to married couples only - the judges clearly stated that they did not look at the wider issue of other statuses... because they weren't asked to. But the upshot was largely that husband and wife can do pretty much what they want.

2) It is much easier to set up shares early when shares are worthless since they can be easily bought at market value and...

3) Having separate share classes helps with paying dividends. If you had your shares as, say 50-50 and you wanted to pay yourself a £10k divi and your wife nothing, then it's easier to pay divis separately to each class (you may have Class A and wife Class B, so you'd simply pay the divi to Class A only). That's easily enough got around by having someone waive a dividend, but you still have more the paperwork to do.

Setting up a share classes is easy at setup, but an accountant often uses a specialist service (such as Jordan's) to split share classes of existing companies, since it has to be done right, and they would charge around £300.

4) At risk of intruding on your marital bliss, the errr... realities of life also should to be considered, so please don't get upset when I mention that if you think there is any posibility whatsoever that you may need to split the company under... less than amicable circumstances... then 50-50 is not such a good arrangement. You would always want to be able to out-vote all other shareholders. 76-24 is a good number for a company with 100 shares, especially if they're split into classes - e.g. 76 Class A for you and 24 Class B for your wife.

Overall, as people have said, best to get advice. It may even be cheaper to set up a new company and allocate the shares how you want them.

Different share classes and the use of dividend waivers are both things that HMRC specifically state can highlight you for an investigation under (the old) S660a. One of the points in Arctic Systems was the fact that both shareholders held ordinary, normal, equal shares that were more than just a right to income.

TSEM4325 - Settlements legislation: summary - factors to look for

The lists below are by no means definitive of situations to which the Settlements legislation can be applied. For further guidance contact HMRC Trusts & Esates Technical Edinburgh.

Disproportionately large returns on capital investments.
Differing classes of shares enabling dividends to be paid only to shareholders paying lower rates of tax.
Dividends being waived so that higher dividends can be paid to shareholders paying lower rates of tax.
Income being transferred from the person making most of the profits of a business to a friend or family member who pays tax at a lower rate.
There are a wide range of arrangements that can potentially be caught by the Settlements legislation which do not involve a trust. Each case will depend on the facts but some of the most common situations which we see are:

Shares subscribed at par that carry only restricted rights.
Shares given away that carry only restricted rights.
A limited share in a partnership gifted or transferred below value.
Dividend waivers.
Situations where dividends are paid only on certain classes of shares.
Dividends paid to the minor children or stepchildren of the settlor.

TSEM4325 - Settlements legislation: summary - factors to look for


TSEM4225 - Dividend waiver - when Settlements legislation may apply

Not all dividend waivers are vulnerable to challenge. Where a company with few shareholders declares a dividend when one or more of the shareholders has waived their right to a dividend in circumstances where other shareholders may benefit, it is possible the Settlements legislation could apply. You should look out for the following factors, which would indicate that the Settlements legislation is likely to apply.

The level of retained profits, including the retained profits of subsidiary companies, is insufficient to allow the same rate of dividend to be paid on all issued share capital.
Although there are sufficient retained profits to pay the same rate of dividend per share for the year in question, there has been a succession of waivers over several years where the total dividends payable in the absence of the waivers exceed accumulated realised profits.
There is any other evidence, which suggests that the same rate would not have been paid on all the issued shares in the absence of the waiver.
The non-waiving shareholders are persons whom the waiving shareholder can reasonably be regarded as wishing to benefit by the waiver.
The non-waiving shareholder would pay less tax on the dividend than the waiving shareholder.

TSEM4225 - Dividend waiver - when Settlements legislation may apply

Where a close company declares a dividend and one or more of the shareholders waives the dividend in circumstances where other shareholders may benefit, there may be an arrangement where the Settlements legislation could apply.

In such cases, we argue that the person making the waiver has indirectly provided funds for an ‘arrangement’ or ‘settlement’ by giving up a sum to which he or she is, or may become, entitled.

The bounty will be represented by the enhanced part of the dividend that the non-waiving shareholders received.

TSEM4220 - Settlements legislation: dividend waivers

[contractor55]

If you are one man band and you are not trading on your company name, is it not better to create a new co. and split the shares from day 1, start a new contract with the new co. and then disband the current co. later?

[northernladuk]

You would always want to be able to out-vote all other shareholders. 76-24 is a good number for a company with 100 shares, especially if they're split into classes - e.g. 76 Class A for you and 24 Class B for your wife.

Different classes of shares are to be avoided and if you had different classes why would you split it 74/24. What would it matter if they are different classes. You can pay what you want to them so split is irrelevant no?

[TaxedToDeath]

Get advice

It is a complicated area, sometimes a few quid to an accountant is worthwhile. Key points:

1) The Arctic systems case went all the way to the HoL and the judgement was limited to married couples only - the judges clearly stated that they did not look at the wider issue of other statuses... because they weren't asked to. But the upshot was largely that husband and wife can do pretty much what they want.

2) It is much easier to set up shares early when shares are worthless since they can be easily bought at market value and...

3) Having separate share classes helps with paying dividends. If you had your shares as, say 50-50 and you wanted to pay yourself a £10k divi and your wife nothing, then it's easier to pay divis separately to each class (you may have Class A and wife Class B, so you'd simply pay the divi to Class A only). That's easily enough got around by having someone waive a dividend, but you still have more the paperwork to do.

Setting up a share classes is easy at setup, but an accountant often uses a specialist service (such as Jordan's) to split share classes of existing companies, since it has to be done right, and they would charge around £300.

4) At risk of intruding on your marital bliss, the errr... realities of life also should to be considered, so please don't get upset when I mention that if you think there is any posibility whatsoever that you may need to split the company under... less than amicable circumstances... then 50-50 is not such a good arrangement. You would always want to be able to out-vote all other shareholders. 76-24 is a good number for a company with 100 shares, especially if they're split into classes - e.g. 76 Class A for you and 24 Class B for your wife.

Overall, as people have said, best to get advice. It may even be cheaper to set up a new company and allocate the shares how you want them.

[Acme Thunderer]

It would be refreshing if someone came on saying they would like to give their wife shares so they could share in their success or were willing to do this even though their wives were in a higher bracket... but alas not.
.

I gave my wife a 10% share shortly after starting my contracting career. She gave up a part time weekend job so that we had our weekends together when I'm working away. She is also Company Sec and a Director (which she isn't paid for) so could be in the firing line if something goes wrong. Only reasonable that she gets something out of it.

[Lewis]

There are many MPs, doctors, lawyers etc.. employing their wives through Ltd companies and/or having them as shareholders; a recent example being Ken Livingstone.

I personally think there will always be support from many places for income shifting making it harder for HMRC to get rid of. But I could be proven wrong.

[northernladuk]

NLUK - you have a point and swapping shares when you've got loads of money in the company is bound to be seen as dodgy. But, surely, for now at least, as long as things are done properly, at the beginning, then the Arctic case got us all off the hook for income shifting with the spouse. FOR NOW AT LEAST

Indeed. Most posters know I always err on the side of caution and will argue the other side to provoke thought but I have never been comfortable with this. Start a new company maybe but not midway through. I honestly can't think of any tax avoidance measures that are more obvious, particularly when people come here asking to do it to reduce their tax liability. It would be refreshing if someone came on saying they would like to give their wife shares so they could share in their success or were willing to do this even though their wives were in a higher bracket... but alas not.

Question : Bearing in mind we are under scrutiny like never before with it all over the news recently, a renewed attempt to fix IR35 and the gov's aggressive stance on tax avoidance is NOW really the best time to be starting this? Just food for thought.

[Hex]

Squeaky Clean

Who defines "Squeaky Clean"?

It seems to me there is a danger of defining it based on what we are second guessing some person(s) at HMRC may think without any idea whether they think that or not.

You can transfer assets (including shares) between spouses with no CGT ramifications. You can give your wife or husband some of your BT shares if you want to, or a you can give them your house in spain. If you do this because it suits you for tax reasons then I believe this is thought to be reasonable and is just tax planning - you don't have to justify it by giving any other reason.

As soon as we talk about the same thing with a contractor's Limited Company Shares people have differing views and it is hard to work out how much of this is paranoia. The Arctic case with S660 was a huge part of this, but it was finally decided in favour of Arctic Systems and you would have thought this would have clarified things a lot but it seems not.

In the end, none of it is guaranteed and who knows what HMRC might really think (if they have collective thinking) and what anyone from HMRC may try to argue if they scrutinize your affairs. It comes down to how risky you think it is.

[psychocandy]

But surely the accountant needs to know if, for example, there is no commercial justification except to reduce your tax liability by using your wife's tax allowance before he gives advice?

As you can see from SB's post every accountant has a different opinion. My first accountant said leave it all well alone. Don't make your wife a director and certainly don't give her shares and voting rights. He was divorced so I can't help think he was passing his bitter experience on.

At the end of the day, really, why would you give your wife shares midway through your company lifecycle if there is no commercial reason except to avoid paying tax? The accounant you want to avoid is the one that just says go for it without any words of caution or advice IMO.

Got to ask SB why is he making his wife a secretary as well?

NLUK - you have a point and swapping shares when you've got loads of money in the company is bound to be seen as dodgy. But, surely, for now at least, as long as things are done properly, at the beginning, then the Arctic case got us all off the hook for income shifting with the spouse. FOR NOW AT LEAST.

No need to make Mrs company secretary. Didnt they remove that requirement (of having one) a while back.

[northernladuk]

Would appreciate any views on timing of issuing a dividend after a share transfer, reasonable commercial justification and other mechanics to get right and overall whether I should be as concerned as I now am. I'm trying to do everything squeaky clean (I do all the dividend paperwork at the right time rather than end of year etc), but even then there seems to be no black and white on this stuff.

Question : Why are you giving your wife shares and issuing the divi? Why not give it to yourself as normal?

Answer that questiona and you will see that you cannot do this in a squeaky clean method due to the whole reason you are doing it. It's about the level of risk you are happy with IMO.

[simondolan]

I have found this a difficult area for which to get good, actionable advice. I set up my company with only me as a shareholder and now realise of course that I could maximise our basic rate allowances if I make my wife a shareholder. I have read everything I can find on here, anywhere else on the web I can find and bought books.

I use one of the big contractor accountants. I have not found them that great for tax advice, but this is not a complaint as I understand their business model. They strongly recommended against transferring any shares and issunig dividends which would include my wife during 2011/12 as it was "too close to the end of the tax year and would attract attention". So I went to a fellow contractor's recommended accountant. He was pretty bullish - do the share split, do another dividend for 2011/12, but do a waiver on my dividend so that my wife can get a dividend but I don't have to go into higher rate tax (I'd already calculated and informed my accountant but not paid my "tax-efficient" dividend for the year). After reading further I realised that this (the waiver) could be a bit of a red rag to HMRC and so went to another accountant and paid for another opinion. That accountant said I should not do anything with the share transfer or dividends until at least the new personal tax year 2012/13 as "you don't want to be the next Arctic Systems". Since that was 2 out of 3 accountants saying the same I took this advice despite it meaning missing an opportunity to extract some profits tax efficiently this tax year (2011/12). I am trying to get an answer at the moment from that accountant about how long I should now leave it and the exact mechanics to avoid issues.

What this goes to show is just what a contentious area it is. The problem we have with the Revenue, and now more than ever, is that anything they don't like, they attack, whether there is justification in law (in our opinion) or not. In terms of the share split, you've asked plenty of different accountants and each has given you a different opinion. They are all (presumably) well meaning and qualified and all have a valid point of view. Also, bear in mind that whatever they tell you, it's not their money that stands to be lost or gained - its yours.

The rather unhelpful answer to your original question is I'm afraid "its up to you". The upside is that you save some money by using your wifes allowances. Downsides are you could get caught up in an investigation and get hammered for legal/accountancy fees and potentially have to repay the money you saved, plus interest and penalties, and put up with the hassle and worry that accompanies these things. What are the odds of this happening? Unlikely in my opinion, but it is a consideration. Consider also what would happen in the event of a divorce if your wife owns half your Company. I've seen this get very messy before.

[Lewis]

I don't get this question. The shares are currently 100% yours personally. You want to give half of them to your wife. This is not a commercial decision it is a personal one. It has nothing to do with the company business, it is to do with who owns the shares in the company.

If this is the sort of advice that accountant is giving I would be suspicious about the rest of their advice.

I agree with the above, I think you just need to complete a share transfer form (you can get from companies house) to transfer x shares to wife and job done.

[northernladuk]

I don't get this question. The shares are currently 100% yours personally. You want to give half of them to your wife. This is not a commercial decision it is a personal one. It has nothing to do with the company business, it is to do with who owns the shares in the company.

If this is the sort of advice that accountant is giving I would be suspicious about the rest of their advice.

But surely the accountant needs to know if, for example, there is no commercial justification except to reduce your tax liability by using your wife's tax allowance before he gives advice?

As you can see from SB's post every accountant has a different opinion. My first accountant said leave it all well alone. Don't make your wife a director and certainly don't give her shares and voting rights. He was divorced so I can't help think he was passing his bitter experience on.

At the end of the day, really, why would you give your wife shares midway through your company lifecycle if there is no commercial reason except to avoid paying tax? The accounant you want to avoid is the one that just says go for it without any words of caution or advice IMO.

Got to ask SB why is he making his wife a secretary as well?

[Hex]

Commercial Justification

The last accountant asked me what my commercial justification was for the transfer of shares.

I don't get this question. The shares are currently 100% yours personally. You want to give half of them to your wife. This is not a commercial decision it is a personal one. It has nothing to do with the company business, it is to do with who owns the shares in the company.

If this is the sort of advice that accountant is giving I would be suspicious about the rest of their advice.

[sb3502]

Quoted from another post on here..

Damn searching is useful.......

True, but then searching old threads won't help much when the law, proposed law (anti-avoidance) and HMRC attitude to such matters is changing. Old advice not necessarily valid for current situations.

SB