Reply to: Gifting Shares - NOT to Spouse

[TheCyclingProgrammer]

The line is drawn at "Connected Persons" which are defined as immediate family members by birth or marriage.

Can I ask what you are basing this on? Where in the settlements legislation or indeed any HMRC guidelines does it mention anything about "connected persons"? Only children are specifically covered by the legislation.

As mentioned before, spouses aren't exempt from the settlements legislation in all circumstances.

Conversely, it is possible for the settlements legislation to apply to anybody, in certain circumstances where the settlor retains an interest. To say that "unconnected persons" are outside the scope if the legislation is wrong.

[malvolio]

The line is drawn at "Connected Persons" which are defined as immediate family members by birth or marriage. There is a specific exemption for spouses, as per Arctic. It does not apply to non-connected persons, so your unmarried partner is out of scope assuming you are avoiding the biblical definitions of incest.

So fascinating as this all is, the bottom line is that the OP is liable for paying the taxes on his mother's share income.

[northernladuk]

Sorry I don't agree.

In that case you are on equally shaky ground if you're giving shares to your spouse in order to save tax. Yet it seems to be mostly accepted that it's fine, certainly post-Arctic.

If HMRC could simply take the above view then why have the settlements legislation in the first place?

I'm not saying that giving shares to your parents wouldn't attract unwanted attention. I do think it is more likely to catch HMRC's eye than an unmarried partner or a spouse, but as I said before, strictly speaking they all carry the same risk of being caught if you were investigated.

(Yes, I do agree with the general sentiment that HMRCs loss in the Arctic case and failed attempts to change the law mean they probably aren't that interested in chasing spouses over this)

But where do they draw the line... and there has to be a line. Spouse/unmarried, ok. Parents.. Hmmm. Friends/strangers... getting silly. As many taxes favour married couples it would make sense for the line to end here. Anything past that is at risk surely.

[DirtyDog]

Sorry I don't agree.

In that case you are on equally shaky ground if you're giving shares to your spouse in order to save tax. Yet it seems to be mostly accepted that it's fine, certainly post-Arctic.

If HMRC could simply take the above view then why have the settlements legislation in the first place?

I'm not saying that giving shares to your parents wouldn't attract unwanted attention. I do think it is more likely to catch HMRC's eye than an unmarried partner or a spouse, but as I said before, strictly speaking they all carry the same risk of being caught if you were investigated.

(Yes, I do agree with the general sentiment that HMRCs loss in the Arctic case and failed attempts to change the law mean they probably aren't that interested in chasing spouses over this)

So, what overturned Ramsay?

[TheCyclingProgrammer]

Regardless of the settlements legislation, if there is an artificial method which serves no commercial purpose other than to avoid tax, then you will be taxed on the transaction as a whole.

Sorry I don't agree.

In that case you are on equally shaky ground if you're giving shares to your spouse in order to save tax. Yet it seems to be mostly accepted that it's fine, certainly post-Arctic.

If HMRC could simply take the above view then why have the settlements legislation in the first place?

I'm not saying that giving shares to your parents wouldn't attract unwanted attention. I do think it is more likely to catch HMRC's eye than an unmarried partner or a spouse, but as I said before, strictly speaking they all carry the same risk of being caught if you were investigated.

(Yes, I do agree with the general sentiment that HMRCs loss in the Arctic case and failed attempts to change the law mean they probably aren't that interested in chasing spouses over this)

[northernladuk]

So it's your call. You have to weigh up all of the above along with the likelihood of you even being investigated. Unless HMRC have the stomach for a new settlements test case, its unlikely, unless you are doing some very silly things (like dividend waivers or having your mother pay the dividends back to you routinely) or you are saving a very large amount of tax.

Some interesting comments. I wouldn't be justifying this based on HMRC not having stomach for a new settlements case though. I would say they have two fronts of attack on a shares to non spouses. One is the Anti-Abuse route that could argue this set up is gaining a tax advantage and the other is testing the settlements. If people start using this one at some point it is going to be worth HMRC picking up on it. They read the forums here and I am sure are more than capable of doing a quick analysis of how much it costs them. They also don't appear to be backwards in pushing cases they can't really win either.

There is also the element that if this starts gaining momentum and people really start to take the piss they will be obliged to challenge it at some point just to stop it snowballing in to a free for all.

I think it would be useful, IMHO, to add to 'weigh up' list is exactly how much you are actually saving doing this over normal method against the potential cost if you are caught in a couple of years. I would be interested to see sample figures over a 5 - 10 year period but I have a feeling they gains realised will not be massive.

[DirtyDog]

Regardless of the settlements legislation, if there is an artificial method which serves no commercial purpose other than to avoid tax, then you will be taxed on the transaction as a whole.

Whether HMRC would be able to successfully argue that gifting 25% of your company to your mother had any commercial purpose or whether it was just there to stop you taking money out yourself and then giving it to her, is a question for the tribunal / courts to decide.

[Wanderer]

Yeah, I've seen that but unfortunately it specifically only applies to gifts of money, not shares. Easily missed (I've done it).

My reading of the context is that "money" could be replaced by shares or some other valuable commodity.

[TheCyclingProgrammer]

In that link it says there is an exception for

an outright gift of money to another person with no strings attached; in other words you give up any rights or control over that
money. The person receiving the gift may choose of their own accord to give the money back to you but you are not treated as keeping an interest in that money.

Perhaps it is permissible to give someone Ordinary shares in in the company (ie, not preference shares which are just a gift of income) so long as you do not retain an interest and it is indeed an unconditional gift. You would definitely want to get proper legal advice on this one and I don't blame accountants who don't want to sail too close to the wind on this one....

Yeah, I've seen that but unfortunately it specifically only applies to gifts of money, not shares. Easily missed (I've done it).

[Wanderer]

HMRC give some examples of where the settlor retains interest in this helpsheet:
http://www.hmrc.gov.uk/helpsheets/hs270.pdf

In that link it says there is an exception for

an outright gift of money to another person with no strings attached; in other words you give up any rights or control over that
money. The person receiving the gift may choose of their own accord to give the money back to you but you are not treated as keeping an interest in that money.

Perhaps it is permissible to give someone Ordinary shares in in the company (ie, not preference shares which are just a gift of income) so long as you do not retain an interest and it is indeed an unconditional gift. You would definitely want to get proper legal advice on this one and I don't blame accountants who don't want to sail too close to the wind on this one....

[TheCyclingProgrammer]

The difference is that there are different tax rules for married couples than there are for everyone else.

Read the spouse exemption again - the rules aren't as different as you think they are.

The whole point of the spouse exemption is *not* to give spouses some kind of unfair advantage/special treatment over non-spouses - it's actually the complete opposite - it's to equalise things and put spouses on the same level as non-spouses.

Ignoring the whole issue of "retaining an interest" - lets assume that the settlor unequivocally does *not* retain an interest or benefit from the arrangement in any way for the moment - if the spouse exemption didn't exist, it would be impossible for a person to gift shares to their spouse or civil partner without being caught because their spouse or civil partner would obviously retain an interest/benefit from the arrangement. A gift to anybody else (except your child) would not be caught at all.

The overall affect of the spouse exemption, if it applies, is to take the spouse/civil partner out of the equation as far as retaining an interest is concerned. That is it. It's not the magic get out clause some people on here seem to think it is.

[TheCyclingProgrammer]

I agree with Martin, especially if this dividend income indirectly benefits you because you no longer have to give her cash/pay her bills/support her in any way/enables her to spend less of her own money hence saving it for when it all passes back to you via inheritance.

Question for Clare (and/or Martin): if you take this line of reasoning, the same could easily be said about the Arctic case. Mr Jones probably (I'm hypothesising here) indirectly benefitted in some way from their arrangement if she was paying household bills, or he didn't have to support her using his own taxed income (obviously I don't know this for certain). Therefore he would have been caught regardless of the spouse exemption. So why didn't HMRC go down this route?

[TheCyclingProgrammer]

There is some argument that the wife supports the husband in running a business which can often take up many hours above and office hours, includes risk which affects both parties and family finances can be squeezed with the start up/risk so it could be said the wife is implicitly involved in the business so could be argued to warrant some concessions.

You could try and make that argument but I think you'd have a hard time with HMRC on that front (even though I do agree with you) - the judges in the Arctic case seemed quite satisfied that the gift of shares in that case was a settlement for the purposes of the legislation because there was an element of bounty - the case was only won on the fact that the spouse exemption applied (so Mrs Jones' interest in the shares was irrelevant) and no attempt was made to argue that Mr Jones retained an interest or benefitted from the arrangement.

That said, when considering whether or not HMRC would be interested in investigating a case, it probably is worthwhile asking the question as to why you are giving the other person shares, regardless off whether it affects if you are caught.

On that basis you may feel its reasonable to say that you feel your spouse/partner should be entitled to a share of the company because they do contribute in others ways and also share the risks. The same could be said of unmarried partners who live together under similar circumstances to a married couple.

Giving shares to anybody else, including parents, may be harder to justify and therefore may increase your risk of being investigated. Hypothetically, of course.

[TheCyclingProgrammer]

Short version: nobody can definitively say whether or not you would be caught because even though a gift of shares to somebody not involved in the business would almost certainly be a settlement for the purposes of the legislation, whether or not you the settlor would be taxed on that settlement is entirely down to whether or not you retain an interest which, as defined in the legislation, is potentially very broad. Barring existing case law that defines some very specific examples of retaining an interest, along with some examples that HMRC provide that are usually easy to avoid, it's not really been tested.

Long version...

This is a reasonably complex subject as opinions vary on some things - most people agree that shares gifted to spouses are fine in light of the Arctic case (although there are still circumstances in which spouses can be caught by the legislation) and many people think that shares to anybody else is dodgy ground - e.g. unmarried partners, family members.

My (thoroughly researched) view is that the settlements legislation can be evaluated with regards to spouses and unmarried partners in much the same way (a lot of people do not fully understand what the spousal exemption means) and arguably anyone else (including parents, but *not* children, see below) as well - it all falls under s624 which states that the settlement (or derived income) will be taxed on the settlor if the settlor or their spouse/partner "retain an interest".

Even between spouses, where the spouse exemption applies, the "retain an interest" clause is still relevant, except it only applies to the settlor in that case (not their spouse/partner - which is the whole point of the spouse exemption).

As noted above, children are explicitly covered in a separate section (s629) and will find you caught no matter what.

It pays to read the legislation and understand it fully. IME, not many people fully understand it (accountants included). It's one thing for a gift of shares to be considered a settlement for the purposes of the legislation (usually because there is an element of bounty) and some people will say that's enough for you to be caught. But that's not the case. You can have a settlement without it being taxed on the settlor. It's essential that the settlor (or their spouse/civil partner if the spouse exemption doesn't apply) retains an interest in some way (see the legislation for the exact wording).

To quote HMRC:

The Settlements legislation most commonly applies to arrangements involving a settlor’s spouse, civil partner or minor children

The reason they make the above statement is because, as long as the the settlor doesn't retain an interest, and assuming for whatever reason the spouse exemption doesn't apply, only gifts of shares to a spouse, civil partner or children can be caught by the legislation.

However, if the settlor (or their spouse/civil partner) does retain an interest in some way, then theoretically a settlement to *anyone* can be caught.

So to answer your question - it all hinges on whether or not the settlor (you) retains an interest and while its easy to defend against some obvious areas of attack (e.g. gifts with conditions attached such as the shares or dividends returning to the settlor), beyond those obvious areas its not really very clear how wide the scope of "retains an interest" is and it will remain that way until specific test cases are brought and there is case law to refer to.

HMRC give some examples of where the settlor retains interest in this helpsheet:
http://www.hmrc.gov.uk/helpsheets/hs270.pdf

FWIW, my unmarried partner is a 25% shareholder in my company and I'm comfortable with our position. I do not feel I "retain an interest" any more than if we were married so I do not personally feel we would be caught, married or not. It's worth noting that in the Arctic case, HMRC never even challenged whether or not *Mr Jones* retained an interest, their sole angle of attack was that the spousal exemption didn't apply (and therefore they would have been caught because *Mrs Jones* obviously retained an interest and benefitted from the shares as she owned them).

If HMRC thought they could have argued that *Mr Jones* retained an interest they could have taken that approach instead and the spouse exemption wouldn't have even come into it. But they didn't.

So it's your call. You have to weigh up all of the above along with the likelihood of you even being investigated. Unless HMRC have the stomach for a new settlements test case, its unlikely, unless you are doing some very silly things (like dividend waivers or having your mother pay the dividends back to you routinely) or you are saving a very large amount of tax.

HMRC helpfully list the various factors they look for in these kinds of cases in evaluating whether or not to investigate further, in this manual - give it a very good read.
http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM4000.htm

If you do it, make sure you check into the IHT implications and make sure you deal with CGT on the disposal of your shares correctly.

[ASB]

There are also potential IHT implications. If it is an outright gift then it will be a potentially exempt transfer for the purposes of inheritance taxes should you die within 7 years.

It is unlikely to be a problem in practice, given the value is probably fairly nominal at this point in time.