Reply to: S660 implications shortly after a share transfer has taken place

[TheCyclingProgrammer]

No. s624 and s625 determines if there is a retained interest. Which there could well be, but then it's exempt due to s626. So the recipient can spend that would benefit the settlor meaning the settlor retains an interest even if it's indirect e.g. paying household bills. However, providing s626 applies (conditions A AND B), the couple are exempt from the settlements legislation.

OK. I'm not talking directly about retained interest here, as per s624/5. I'm talking about the definition of an outright gift as per s626.

As I said before, the spouse exemption only applies to outright gifts. As defined by s626, a gift is only considered an outright gift if the shares or dividends are not applicable for the benefit of the giver. Ergo, if the giver (settlor) benefits (depending on how you define benefit), then it's not an outright gift and the spouse exemption doesn't apply.

I feel like we're going round in circles a bit here. When you said that "retained interest" is not relevant to the spousal exemption, strictly speaking you are correct; the point I trying to make is that the definition of retained interest in s625 is very very similar to the definition of outright gift in s626, meaning if it could be construed that there is retained interest under s625 because the settlor themselves have benefitted then they could equally be said to have benefitted under the exclusions of the meaning of an outright gift in s626.

We could probably debate this back and forth forever but I think its somewhat of a moot point. HMRC have never challenged an arrangement using settlements legislation in this way before and I don't expect them to either as it would be fairly easy for them to do and I think they would have done so by now.

[ContrataxLtd]

No. s624 and s625 determines if there is a retained interest. Which there could well be, but then it's exempt due to s626. So the recipient can spend that would benefit the settlor meaning the settlor retains an interest even if it's indirect e.g. paying household bills. However, providing s626 applies (conditions A AND B), the couple are exempt from the settlements legislation.

Or in short, just because there is a retained interest doesn't mean that the settlements legislation catches the income so that it is taxed on the original settlor because the spousal exemption can override this.

[Craig@Clarity]

So you're effectively saying the recipient of gifted shares in a spousal situation cannot spend their dividend income on anything that could be construed as benefitting the settlor in any way shape or form then? No household bills, no shared assets, no joint accounts, nothing spent on the kids etc.?

In that case, what exactly is the money supposed to be spent on?

No. s624 and s625 determines if there is a retained interest. Which there could well be, but then it's exempt due to s626. So the recipient can spend that would benefit the settlor meaning the settlor retains an interest even if it's indirect e.g. paying household bills. However, providing s626 applies (conditions A AND B), the couple are exempt from the settlements legislation.

[Craig@Clarity]

The sections of HMRC guidance I quoted are almost verbatim quotes from the actual legislation.

I agree. However, with HMRC even with the slightest change in a sentence, could be interpreted differently. I only know this as the tribunal will throw out any reliance on "HMRC guidance". They always refer to the law. I also know that their guidance can be completely misleading too (B.E.T.)

[TheCyclingProgrammer]

This is indirect retained interest and covered under s625

So you're effectively saying the recipient of gifted shares in a spousal situation cannot spend their dividend income on anything that could be construed as benefitting the settlor in any way shape or form then? No household bills, no shared assets, no joint accounts, nothing spent on the kids etc.?

In that case, what exactly is the money supposed to be spent on?

[TheCyclingProgrammer]

Don't read HMRC's guidance in cases like these. Go straight to the law:

The sections of HMRC guidance I quoted are almost verbatim quotes from the actual legislation. I only referenced those as it was easier. s626 clearly states that an gift is only considered an outright gift if its not applicable for the benefit of the giver and only outright gifts are covered by the exemption.

HMRC technical guidance should not be dismissed as its probably a fair indicator of what they would challenge and what they would not.

[Craig@Clarity]

Ok, say if you gifted a dividend to your spouse of say, 10k, and you receive 10k, and this 20k was put towards the purchase of a car which would be driven by the giver, would this be deemed as providing benefit to the giver? What about in the case of a property purchase etc?

This is indirect retained interest and covered under s625

[Craig at Nixon Williams]

Yes. No. Maybe. There are differing opinions on this, the only thing that can be said with any certainty is that this sort of thing hasn't been challenged by HMRC to date or tested in court. But that's not to say it wouldn't in the future.

However, as accountants/tax advisors we can't just say do it etc. we have to explain the possible risks involved and then it's up to the clients as to where their attitude to risk stands. I believe this is why NW have the part in their about the possible challenge by HMRC.

These two comments hit the nail on the head as to why we have that section included in the guide. I'm sure that if you were to ask another accountant you will get a different opinion, but as Martin@Contratax has suggested - we prefer to outline the possible risks to a client so that they can make an informed decision.

To the OP - if you would like to PM me with your contact details, I will be more than happy to speak to you about your specific circumstances in more detail.

Craig

[Craig@Clarity]

Don't read HMRC's guidance in cases like these. Go straight to the law:

http://www.legislation.gov.uk/ukpga/...rt/5/chapter/5

In the Arctic Systems case:

1. There was an arrangement (purely by fact that Mr Jones intentionally gave shares to his wife, took a lower salary and split dividends)
2. Retained interest (as found in Crossland v Hawkins and it was mentioned that the settlement is paid for the benefit of their kid)
3. It was bounteous (something for nothing).

If all three stages above pass for settlement, that's when you look at s626 to see whether there was an inter-spouse transfer and wholly a right to income.

If anyone is interested, there's another settlement case for a bit of light reading (Donovan & Maclaren)

[TheCyclingProgrammer]

Ok, say if you gifted a dividend to your spouse of say, 10k, and you receive 10k, and this 20k was put towards the purchase of a car which would be driven by the giver, would this be deemed as providing benefit to the giver? What about in the case of a property purchase etc?

Yes. No. Maybe. There are differing opinions on this, the only thing that can be said with any certainty is that this sort of thing hasn't been challenged by HMRC to date or tested in court. But that's not to say it wouldn't in the future.

My opinion, and it is just that, is that the settlements legislation was never really intended for this sort of thing, but HMRC have chosen it as their weapon of choice to combat income splitting - largely, but not completely unsuccessfully to date, but hey. It was originally intended to cover trust scenarios but the wording of the legislation is pretty broad which is why HMRC use it.

I believe retained interest to mean a considered arrangement whereby it was always intended for dividends to be diverted back to the settlor or in the case of trusts, where the settlor is a beneficiary of the trust; I don't think retained interest has anything to do with what the recipient of the shares spends their dividends on as long as its up to them what they do with it. If this was a valid concern, then HMRC could have tried this approach in the Arctic case and started questioning what Mrs Jones spent her money on but they didn't did they? That means they either a) didn't think of it (seems unlikely) or b) knew that it wasn't a valid argument.

But that's just me. There are others who believe that paying dividends into joint accounts or using it to buy jointly owned assets etc. is a risk. You'll have to use your own judgement.

[ContrataxLtd]

Sure, nothing is ever certain, but in terms of risk I'd say its at the pretty low end of the scale. If OP has a PCG+ membership, then I'd not lose any sleep over it.

Personally, if I were in the OP's shoes I'd do the same and also agree with you that it is pretty low risk.

However, as accountants/tax advisors we can't just say do it etc. we have to explain the possible risks involved and then it's up to the clients as to where their attitude to risk stands. I believe this is why NW have the part in their about the possible challenge by HMRC.

That said, if this went through the courts and went in HMRC's favour then I'm not sure where that would leave everyone who made a gift with large reserves in the company so even though it's low risk there is the possibility of a high tax liability if it were ever challenged!

Martin
Contratax Ltd

[DigitalUser]

In other words: if the gifted property is payable or applicable for the benefit of the settlor (or their wife/civil partner), the settlor retains an interest. In the case of inter-spouse transfers, if the gifted property is payable or applicable for the benefit of the giver, it is not an outright gift and the spouse exemption once does not apply.

Ok, say if you gifted a dividend to your spouse of say, 10k, and you receive 10k, and this 20k was put towards the purchase of a car which would be driven by the giver, would this be deemed as providing benefit to the giver? What about in the case of a property purchase etc?

[TheCyclingProgrammer]

Hi TCP

Personally I don't think you can be confident in such a wide sweeping statement like that as in my opinion case law hasn't established this fully.

Sure, nothing is ever certain, but in terms of risk I'd say its at the pretty low end of the scale. If OP has a PCG+ membership, then I'd not lose any sleep over it.

[TheCyclingProgrammer]

Of course there's a retained interest. It maybe an indirect interest but nonetheless, it covers the second criteria.

Inter-spouse exemption is not related to "retained interest" so you shouldn't link it.

I respectfully disagree.

The definition of outright gift and retained interest use almost identical wording, the only difference being that in the general case, the settlor is also treated as retaining an interest if their spouse/civil partner retains an interest (hence the need for the spouse exemption) and in the spouse exemption wording, it only applies to the settlor/donor.

The definition of retained interest:

A settlor has retained an interest if the property or income may be applied for the benefit of the settlor, a spouse or civil partner.

TSEM4200 - Settlements legislation: settlor retains an interest

Note: the above seems pretty clear to me. Nowhere does it say "a settlor has retained an interest if they also own shares in the company that they run and are the primary earner for or because their spouse also pays the gas bill".

Additionally, HMRC provide a help sheet full of examples of where the settlor does or does not retain an interest and it seems very clear that HMRC's idea of "retained interest" is one where there are conditions attached or some kind of expectation that the shares or dividends would make their way back to the settlor.

Regarding an outright gift:

The rule that where the settlor has retained an interest in property in a settlement the income arising is treated as the settlor’s income for all tax purposes (TSEM4200) does not apply to an outright gift by one spouse or civil partner to another unless...

A gift is not an outright gift if
it is subject to conditions, or
re any circumstances in which the property, or any related property
is payable to the giver
is applicable for the benefit of the giver, or
will, or may become, so payable or applicable.

http://www.hmrc.gov.uk/manuals/tsemmanual/TSEM4205.htm

In other words: if the gifted property is payable or applicable for the benefit of the settlor (or their wife/civil partner), the settlor retains an interest. In the case of inter-spouse transfers, if the gifted property is payable or applicable for the benefit of the giver, it is not an outright gift and the spouse exemption once again does not apply.

If what you say is true about their being retained interest in an indirect way, then strictly speaking it would never be possible for the spousal exemption to apply in the typical income splitting scenario, but we know it does apply because Arctic proved it.

[Craig@Clarity]

I would hope not, as it would no longer qualify as an outright gift and the spouse exemption would not be applicable!

Of course there's a retained interest. It maybe an indirect interest but nonetheless, it covers the second criteria.

Inter-spouse exemption is not related to "retained interest" so you shouldn't link it.