Reply to: Income Shifting

[TheCyclingProgrammer]

The CGT isn't really an issue:

~ value of 25% in a proprietorial company probably very little
~ Business Asset Gift Relef applies to holdover the gain (although you do need, at least in theory, to claim this (never seen HMRC actually press than point, but better to be safe)) - http://www.hmrc.gov.uk/helpsheets/hs295.pdf refers, S165 TCGA. Relief for gifts of business assets applies regardless of marital status, cf gifts of non business assets which are only exempt in marriage / civil partnership

Hi Jessica

You're right, even without the holdover relief the CGT probably wouldn't amount to very much but I now have a new accountant who has engaged a specialist tax adviser to take care of this for me, including valuing my company, submitting an amendment to my tax return and dealing with the holdover relief if they deem it necessary (I've been told they might advise to do it anyway to protect me should HMRC question the valuation).

[Jessica@WhiteFieldTax]

The CGT isn't really an issue:

~ value of 25% in a proprietorial company probably very little
~ Business Asset Gift Relef applies to holdover the gain (although you do need, at least in theory, to claim this (never seen HMRC actually press than point, but better to be safe)) - http://www.hmrc.gov.uk/helpsheets/hs295.pdf refers, S165 TCGA. Relief for gifts of business assets applies regardless of marital status, cf gifts of non business assets which are only exempt in marriage / civil partnership

[TheCyclingProgrammer]

Re your last point, about getting married, I believe the complete opposite will apply. There is no settlement between spouses; Arctic settled that for once and all.

As for expert advice, PCG wrote the definitive guide some while back, based on the Arctic case and the legal arguments raised there. Members only, but since all sensible contractors are PCG members, that isn't a problem of course ( ). Ask the question on their fora and you may even find Geoff Jones (of Arctic fame) giving you the answers...

Well, I used to be a member but it lapsed...perhaps I should renew.

The getting married issue is an interesting one; my interpretation was that because the gift of shares was made while we were not married, that the exemption for spouses rule would not suddenly apply once we married. Wouldn't the settlement have occurred at the point at which she received the shares?

I'm also seriously considering this QDOS product:
Tax Liability Cover - TLC35 - Full IR35 Insurance - Qdos Consulting

Seems like £600 a year might be worth it for peace of mind.

Perhaps I should renew my PCG membership too...

[malvolio]

Re your last point, about getting married, I believe the complete opposite will apply. There is no settlement between spouses; Arctic settled that for once and all.

As for expert advice, PCG wrote the definitive guide some while back, based on the Arctic case and the legal arguments raised there. Members only, but since all sensible contractors are PCG members, that isn't a problem of course ( ). Ask the question on their fora and you may even find Geoff Jones (of Arctic fame) giving you the answers...

[TheCyclingProgrammer]

So, I've heard back from my accountant and his view is that I probably don't need to worry too much about this, that the whole thing is a "grey area" and that opinions will differ amongst accountants. He has also recommended taking specialist advice in this area if I need more advice (which I am in the process of getting).

To make it absolutely clear, this is my situation:

* My partner and I are not married - we are engaged; we live together and have a child.
* Limited company with shareholding split 75/25 between me and my partner. The 25 shares were gifted to her for a nominal value of £1 a share; the same nominal value attached to the shares when the company was formed. The share transfer form listed the consideration as £25 and it was not sent to HMRC as no stamp duty was due on the transfer.
* Accountant advised that due to there being no gain on the share transfer that no CGT was due.

I'm starting to feel that while I've been wrongly advised on the CGT situation (CGT gain should have been based on fair market value of the shares, regardless of what I was paid for them), that it is easily rectified as the CGT would appear on my self-assessment for the last tax year. I've already submitted mine but can easily submit an amendment. I believe a fair valuation would still not result in a large CGT bill after my annual allowance and possibly entrepreneurs relief? (or I think I can apply for hold-over relief).

Regarding the settlements situation, it seems like there is a risk, but the overall risk of a) being investigated and b) losing seems relatively small. Certainly no higher than the risk of being investigated over IR35 that many of us have hanging over us. My accountants view is don't worry about it. Does this seem reasonable?

To the various accounting firm representatives on this board: I'm more than willing to pay for good advice here. Please let me know if you feel you can help me out and I will get in touch.

It appears to me my options are:

* Not worry about it. The risk is small. Be prudent and keep aside some money to cover a potential tax bill if the worst happens.

* Decide the risk is not worth it and somehow fix the whole situation. Not sure what my options are here, short of getting the shares back or outright declaring my partner's dividends as a settlement for tax purposes on my SA. Close the company and start another one?

* Finally, something that has me wondering...the whole "retained interest" clause specifically states that there is a settlement if I "or my spouse" retain an interest or receive a benefit from the shares. I don't believe that is currently the case, but when my partner and I get married, would we suddenly be caught because she is now my spouse and receives a benefit from the shares?

[TheCyclingProgrammer]

If you're there all ready its probably just as easy to leave things as is for now, get your accountant to value up the tax at risk, and set that aside. It should, in theory, be the same as the tax effect of unwinding, however you always have the possibility that the issue will drop out of time, cf the (IME small) risk of penalties etc if it goes against you.

Thanks Jessica. I might need some extra advice on this (or a second opinion), I've dropped you an email.

[Jessica@WhiteFieldTax]

Out of interest, should, as a result of hearing back from my accountant (and a second one who I am speaking to to get a second opinion), I decide that all of this is not worth any further risk or hassle, how would I go about reversing all of this?

Should I just buy the shares back from my partner for the original price and take a full shareholding back in the company and take the chance that we won't be investigated for the dividends paid out over the last year?

If you're there all ready its probably just as easy to leave things as is for now, get your accountant to value up the tax at risk, and set that aside. It should, in theory, be the same as the tax effect of unwinding, however you always have the possibility that the issue will drop out of time, cf the (IME small) risk of penalties etc if it goes against you.

[northernladuk]

Out of interest, should, as a result of hearing back from my accountant (and a second one who I am speaking to to get a second opinion), I decide that all of this is not worth any further risk or hassle, how would I go about reversing all of this?

Should I just buy the shares back from my partner for the original price and take a full shareholding back in the company and take the chance that we won't be investigated for the dividends paid out over the last year?

Surely two changes in shareholding has a greater chance to attract HMRC's attention so increasing the risk of getting found out?

Maybe your accountant can give his wisdom on this one? I guess the worst that can happen is that you get taxed on it so if you have enough in your warchest you are covered?

[JoJoGabor]

I originally started this thread and spent a long time researching it, and getting different opinions from various sources. Other contracting colleagues accountants(who I had never heard of) had advised them you don't need to be married, to which I concluded was a bit dodgy. Ttis matched the advice from my own well respected accountancy firm. My conclusion was you must be married, otherwise don't take the risk.

[TheCyclingProgrammer]

Out of interest, should, as a result of hearing back from my accountant (and a second one who I am speaking to to get a second opinion), I decide that all of this is not worth any further risk or hassle, how would I go about reversing all of this?

Should I just buy the shares back from my partner for the original price and take a full shareholding back in the company and take the chance that we won't be investigated for the dividends paid out over the last year?

[northernladuk]

There is a definition in the pdf I linked which backs up Mal's comment but isn't an official statement.

[TheCyclingProgrammer]

You'll find it in the HMRC Guidance here (I haven't traced it to the source legislation): TSEM4200 - Settlements legislation: settlor retains an interest

Thanks. I've read through that twice and HS270 and unfortunately not one of the examples HMRC provide match my situation. It's becoming rapidly clear that if we were already married then this wouldn't be a problem.

As malvolio said, whether or not a transfer of shares could be considered "bounteous" seems open to intepretation to me. Do HMRC clearly define this concept anywhere?

This is the best I could find:

"Settlement must include an element of bounty, as decided in the tax case of CIR v Plummer (54 TC 1). Bounty is the provision of value without any corresponding quid pro quo, usually a gift or a transfer at less than full value."

Source:
http://www.hmrc.gov.uk/manuals/tsemmanual/tsem4110.htm

[Clare@InTouch]

I can't find the word "bounteous" anywhere in the legislation. Which section should I be looking at?

You'll find it in the HMRC Guidance here (I haven't traced it to the source legislation): TSEM4200 - Settlements legislation: settlor retains an interest

[malvolio]

I can't find the word "bounteous" anywhere in the legislation. Which section should I be looking at?

"Bounteous" in this context is(very roughly) someone gaining income for no perceived effort. If the shares are bought at a fair value from the purchaser's own income there is no bounty; it's a simple business transaction. Giving the shares for free may be bounteous, unless you can prove they are a gift or reward of some kind for services rendered (ahem...). Personally I would say that looking after the kids so you can go to work qualifies, but I'm not an accountant.

[TheCyclingProgrammer]

OK, sanity check is called for, I think.

Married people can have shares in their company regardless of who earns the money, without any tax implications other than normal personal PAYE on the earned/dividend income. Nor does it matter how the shares were acquired.

If you want belt and braces, ensure such shares carry equal rights wrt voting and proportional earnings.

Giving (or pretending to sell) shares to a connected person comes under S660 (it's what it's meant to stop). A connected person buying shares at full market value may have a defence if there is a solid business reason for it, but it is not to be recommended as a strategy.

Unmarried people not of the same family are not connected persons (the clue is in the name) so there are no restrictions on share ownership. However, to avoid accusations of tax avoidance (not that there's anything wrong with avoidance but let's not give Hector ammunition), the shares should be paid for at market value.

Market value is whatever the company decides it is: 10 shares in a company with £100k of assets may be worth £100 each or four pence. However, given your legal duty as a director to earn the most you can for your shareholders, and to avoid accusations of malpractice, it's probably better to charge the former rather than the latter, or at least something a bit closer to it.

And if you want chapter and verse, read the PCG guide on the subject. You are, of course, a member already...

HTH.

malvolio - thanks for the response. I'm with you, all the way up until your point about market value and earning the most I can for my shareholders. I'm not creating new shares in my company, I'm transferring my own shares. The company value has not be diluted in anyway. Is this not a concern for me rather than the company?

To be honest, I entered this thread worried about settlements legislation and seem mostly convinced that in normal circumstances that it does not apply to our situation.

However, I am now concerned about the valuation of the shares and what affects that could have. Something I have put to my accountant.