Sale of shareholding to own company

[topcom]

We have a client company and the wife is the main earner. The shares are held 50/50 a small salary is drawn by wife and then dividends voted. Due to cash flow the husband did not receive his dividend and this was deferred to a later year. Is the dividend treated as received when the wife received her dividend?
The husband has a small business consultancy ltd co and another co he has 50% share holding in has been involved in developing information technology digital telephones and has not made any profits to date. The wife has had a lot of health problems and enforced absences and the husband has been spending a lot of time on her company affairs and invoiced her from his ltd co and still received dividends from her co. Is it feasible for the husband to sell his shares in his wife's co to his ltd co. She wishes him to resign as a director in any event from her co?
Chartertax

[Nigel Lord]

Chartertax

Dividends are taxable when voted unless waived, by the shareholder. (There are problems where one spouse waives a dividend and the other spouse takes theirs).

If the company's minutes and accounts reflect the dividend, it should have been declared on the recipient's tax return, even if never physically paid as it is available to him and (presumably) sitting on loan account.

The shares held in the wife's company could be sold to the husband's company. This would be treated as a chargeable event for CGT purposes and the sale proceeds would be computed at market value as it is a connected party transaction. Hold-over relief could then be claimed under Section 165, TCGA, 1992. The proceeds may not exceed the CGT base cost otherwise hold-over relief is restricted.

If you require any further assistance please do not hesitate to contact us, and we will be happy to act on your behalf.

Nigel Lord
Lord Associates
Taxation & Business Consultants
102 Smarts Lane
Loughton
Essex, IG10 4BS
020 8508 1642 & 07769 931852
lordassociates@ntlworld.com

[Huw Williams]

There has been a lot of discussion about this sort of company on the accounting web site recently together with a press report which can be accessed through the news pages on our website www.huwwilliams.co.uk. The Inland Revenue are increasingly interested in these small companies.

If a dividend has not been shown on the personal tax return and should have been, this should be remedied as soon as possible.

As Nigel says, the sale of the shares into his company would trigger a capital gain. There are also some interesting antiavoidance rules which might come into play as the tax laws do not like people being able to extract cash from a company as capital (purchase of shares) when it might have come out as income (dividends).

But more importantly why does he want to do this? By selling the shares into the company he would be giving up half the rights (as he only owns 50%). If I understood the intention I might be able to advise on the consequences more fully.

Huw Williams
enquiries@huwwilliams.co.uk

[topcom]

Thanks for your comments. The dividend was not shown in the accounts as paid to the husband. So it was not technically voted at that time. I noted that dividends received by a limited company are not subject to tax, that was the main interest in this matter.
Chartertax