Reply to: LTD Company spouse as shareholder query

[northernladuk]

If the plan now is to give shares to mum, and she does bugger all for them, gets a dividend which comes back to the OP, then yes. The Ramsay Principle makes it pretty clear.

If the plan is to have mum work for salary, then it becomes a little harder, since some money could come out this way, as long as it is a reasonable wage for the work that they are doing, so that it passes the arm's length test. That's unlikely to make too much difference to paying off £150k though.

So, choices are:

1) Do nothing. Take dividends and pay the additional tax on those as necessary.

2) Gift shares to the wife and pay dividends to both husband and wife. Arctic makes this clear as allowable.

3) Employee mum on a real wage, do nothing with shares. Ain't going to make much of a dent in £150k.

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Personally, I'd either pay the extra tax and leave it as it is, or gift the shares to the wife (factoring in the additional student loan repayments as well).

Agree with all this and as is always the case in these types of request, there is no requirement or intention to have the mum doing anything, it is just a tax sham.

[Wanderer]

I agree - I was referring to the original suggestion rather than the later one of making the mum a shareholder (I'd missed that suggestion, thought it was to pay mum as an employee rather than a shareholder).

OK, fair point!

However, my point still remains - as long as you follow the law set by that case, you'll be fine

Ahh, so you think he should marry his mum then?

As long as your mother is doing 20% of the work and bringing in 20% of the income then you'll be OK. If she isn't doing both of those things, then you'll struggle to justify that it doesn't fall foul of the settlements legislation if there was an investigation.

Agree 100% with that.

Perhaps the accountant is taking the OP's description of the situation at face value or this is routine and they don't perceive it as a high risk strategy anyway. Personally, I think they should have come back with a statement like that one by TheFaQQer above....

[TheFaQQer]

Thinking on it, I'll throw in another possibility....

Company buys the house from mum at valuation price.

Charges mum rent for living there at market rate.

(Mum might now be able to claim housing benefit, since she is paying rent and has no income???)

Company sells house when they want to, paying the appropriate CGT on the sale.

[TheFaQQer]

Quite possibly but if the OP's intention, which it quite clearly is, is to use his mothers tax breaks to get money out of the company which then end up back in his account he is stepping in to an area not covered by this case. This is just giving the money to that person, the matter of avoiding tax by getting it back is a different kettle of fish altogether surely?

If the plan now is to give shares to mum, and she does bugger all for them, gets a dividend which comes back to the OP, then yes. The Ramsay Principle makes it pretty clear.

If the plan is to have mum work for salary, then it becomes a little harder, since some money could come out this way, as long as it is a reasonable wage for the work that they are doing, so that it passes the arm's length test. That's unlikely to make too much difference to paying off £150k though.

So, choices are:

1) Do nothing. Take dividends and pay the additional tax on those as necessary.

2) Gift shares to the wife and pay dividends to both husband and wife. Arctic makes this clear as allowable.

3) Employee mum on a real wage, do nothing with shares. Ain't going to make much of a dent in £150k.

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Personally, I'd either pay the extra tax and leave it as it is, or gift the shares to the wife (factoring in the additional student loan repayments as well).

[northernladuk]

I agree - I was referring to the original suggestion rather than the later one of making the mum a shareholder (I'd missed that suggestion, thought it was to pay mum as an employee rather than a shareholder).

However, my point still remains - as long as you follow the law set by that case, you'll be fine

Quite possibly but if the OP's intention, which it quite clearly is, is to use his mothers tax breaks to get money out of the company which then end up back in his account he is stepping in to an area not covered by this case. This is just giving the money to that person, the matter of avoiding tax by getting it back is a different kettle of fish altogether surely?

[TheFaQQer]

Thanks Wanderer. The way I see it, this is probably the better option for me as my mother will actually be working for me doing company accounts and other mgt stuff so I wouldn't be taking the p*ss. Even though my mother earns a lot less than my wife, I would keep the split at 80/20 so not taking full advantage of my mothers tax allowance.

As long as your mother is doing 20% of the work and bringing in 20% of the income then you'll be OK. If she isn't doing both of those things, then you'll struggle to justify that it doesn't fall foul of the settlements legislation if there was an investigation.

Ran it by my accountant (SJD) last night who confirmed it would be ok so will look into it a bit more and decide next week.

That surprises me that they think you won't fail the legislative test. I'd love to know their reasoning behind it (and whether they would provide an indemnity which says that if you were caught they would cover your legal and tax bills).

[TheFaQQer]

Jones v Garnett relies on the S660a exemption in the settlements legislation which only applies to spouses or civil partners.

Unfortunately someone's mum can be neither of these so the director would have to prove that it wasn't a settlement and that's potentially difficult....

I agree - I was referring to the original suggestion rather than the later one of making the mum a shareholder (I'd missed that suggestion, thought it was to pay mum as an employee rather than a shareholder).

However, my point still remains - as long as you follow the law set by that case, you'll be fine

[northernladuk]

Thanks Wanderer. The way I see it, this is probably the better option for me as my mother will actually be working for me doing company accounts and other mgt stuff so I wouldn't be taking the p*ss. Even though my mother earns a lot less than my wife, I would keep the split at 80/20 so not taking full advantage of my mothers tax allowance. Ran it by my accountant (SJD) last night who confirmed it would be ok so will look into it a bit more and decide next week.

Cheers.

This is a total sham and HMRC will see straight through it. For someone that wanted to play it safe you seem to have quite happily fallen in to the 'dodgy' camp very easily.

SJD will say it is ok as they cannot argue what you say or the theory. They cannot control the situation if you are running a complete sham at home. That bit is up to you.

Where it is ok in theory I wouldn't touch this with a barge pole. Primarily because you are giving your money away, you can't get it back of your parents without getting even deeper in to trouble and secondly you will have HMRC sniffing around in no time.

[Wanderer]

They can have an opinion on anything they like. They might not like what some people do. However, until there is legislation which flatly over-rules the precedent set in Jones v Garnett then their thoughts are irrelevant.

As long as the OP follows the guidance from that case, there is nothing that HMRC can do about it.

Jones v Garnett relies on the S660a exemption in the settlements legislation which only applies to spouses or civil partners.

Unfortunately someone's mum can be neither of these so the director would have to prove that it wasn't a settlement and that's potentially difficult....

[TheFaQQer]

HMRC is obviously taking a much closer look at arrangements made by contractors and freelancers, and they have a different opinion on tax planning, deeming much of it as aggressive avoidance.

Seek professional advice.

They can have an opinion on anything they like. They might not like what some people do. However, until there is legislation which flatly over-rules the precedent set in Jones v Garnett then their thoughts are irrelevant.

As long as the OP follows the guidance from that case, there is nothing that HMRC can do about it.

[northernladuk]

Technically, she can, but there are limits on what can be gifted without it incurring tax, and whether it would still fall within the estate if she died within a certain time period.

For example, my grandad gave a reasonably substantial sum to me, my brother and my sister, but it had to be accounted for and recorded so that if he died within a few years, it would essentially revert to his estate for IHT purposes.

This is true on it's own but there is a bigger picture here. Yes you can do that but if that money is the money coming from the company and comes back to you it would be seen by HMRC as avoiding paying tax so they would come down on that like a ton of bricks. IHT is not an issue here, passing money to a family member from the company that then finds itself back in your bank account is.

[LandRover]

Careful

HMRC is obviously taking a much closer look at arrangements made by contractors and freelancers, and they have a different opinion on tax planning, deeming much of it as aggressive avoidance.

Seek professional advice.

[Wanderer]

Technically, she can, but there are limits on what can be gifted without it incurring tax, and whether it would still fall within the estate if she died within a certain time period.

Yes, if it someone gifts ther own money up to a certain limit it becomes a "potentially exempt transfer" for inheritance tax purposes provided they survive for a certain time after the gift (7 years?).

However, that is presuming that she earned the money herself in the first place which HMRC will argue isn't the case here. They will argue that the company director gave shares to a connected person (other than a spouse or civil partner) in an arrangement they wouldn't have entered into at arms length with a stranger and that connected person gifted the money back to the director (in cash or in kind) which creates a settlement and is therefore taxable on the the settlor (ie, the director).

If people were allowed to do this then everyone would make their kids shareholders and pay them dividends then raid their bank accounts...

[TheFaQQer]

2. This money will now be your mother's money and she cannot simply gift it back to you (either in cash or in kind like buying a car or other goods which are gifted to you)

Technically, she can, but there are limits on what can be gifted without it incurring tax, and whether it would still fall within the estate if she died within a certain time period.

For example, my grandad gave a reasonably substantial sum to me, my brother and my sister, but it had to be accounted for and recorded so that if he died within a few years, it would essentially revert to his estate for IHT purposes.

[TheFaQQer]

Gotta step up if you are gonna mess with this kinda stuff.

Can someone add this to the NLUK comment generator, please?