Dividends and the tax free £5000 band.

[MANHAR]

Hi everyone.

With the new dividend rules a client has suggested a change to his Company's shareholding which I am uncertain about. Currently the Ltd company has 100 shares owned by himself (60 shares) and his wife (40 shares). It is a general building maintenance business in which the husband does the manual work and his wife manages the book keeping and office administration (although based at home). They both take small salaries and the balance in dividends of about £20,000 pa combined.

The suggestion is that as there will be the £5000 dividends free of tax per person would it be possible for his wife to transfer some of her shares to their son who does not work in the business. The son could pay or be gifted the shares transferred based on the Balance Sheet value of the company. The husband would retain his 60% shareholding. This way they will as a family be able to draw out £5000 x 3 = £15,000 as dividends free of tax. Thus effectively saving £5000 x 20% = £1000.

The son would be paid his share of the dividends without any conditions as the parents believe it will be a way of distributing their assets as a way of IHT planning.

Would this be a viable proposition or would it be as troublesome as the Panama Papers? Is it a scenario others have considered?


Would really appreciate your thoughts.

Thanks.

[strawn]

I write as a newcomer to the world of tiny companies. The wife's work justifies her salary. Her dividends come to her by virtue of her status as a shareholder, not by virtue of her work. She can gift her shares to whomever she likes, and he will then receive dividends accordingly i.e. as a shareholder. He shouldn't be paid any salary unless he undertakes work for the company.

[LozaACCS]

It is a scenario I think many of us are considering.
The wife can clearly transfer shares to whoever she wants to, the issue will be income tax, specifically the settlements legislation and S624 ITTOIA 2005.
The scenario is resonant of Artic Systems which is now some 9 years on, the threatened legislation has not happened but this does not mean that HMRC cannot challenge income shifting.
If HMRC can establish that there is bounty in the arrangement then the settlements legislation might apply and the income arising to the son can be assessed on the settlor (dad) at his marginal rates.
I think the new rules have left a gap (a 5K dividend exemption) that will inevitably bring further legislation to prevent the scenario you are describing.
There are interesting issue following on, for instance what happens if all of the company income is distributed, but because some is allocated to non directors, this may leave the directors loan account overdrawn, could the other shareholders assign their dividends to the director to avoid the S455 charge

[strawn]

@LozaACCS: you know infinitely more about this than I do. May I ask a supplementary question?
Would the tax position be different if, instead of the mother gifting shares to the son, she sold them to him?

[LozaACCS]

possibly.
S620 ITTOIA deals with an arrangement that might be construed as a settlement, if so S624 is in point (if the settlor retains an interest), S625 then defines what is meant by retaining an interest.
A gift can clearly come within this provision, but S624 will not apply if the gift is an outright gift unless
(a) The gift does not carry a right to the whole of the income or
(b) The property given is wholly or substantially a right to income
The provisions at S625 cannot apply if the settlor/spouse/civil partner cannot benefit in any way from the arrangement, so for instance whilst a gift might be caught under (a) or (b), if the resulting income remains the property of the child (who is not a minor) and cannot be returned to the settlor/spouse/civil partner then I cannot see how the legislation can apply.

In the case of a sale the position with S 620 is clearly more difficult (but not beyond doubt) since there is a question whether the sale was at market value and how this interacts with S625 if say the whole arrangement (which this appears to be) was designed to divert income, hence my point that the fail safe must be to exclude the settlor/spouse/civil partner from benefit