Arctic Systems case - implications

Arctic Systems case - implications

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How far does S660a ICTA 1988 extend, after Arctic Systems?

A hypothetical scenario:-

Husband owns 50% of issued shares in a private company, which is his ex-employer. He remains a Director but has no day-to-day involvement in the continued trading operations. The company also owns a freehold property producing a substantial rental income. [i.e. there is a potentially substantial capital value to the shares].
Company pays dividends to husband of £50,000 p.a.
Husband's other earnings are £5,000 p.a.
Wife has total earnings of £5,000 p.a.

Husband transfers 50% of shares to wife in order to avoid dividend income falling into his upper rate band.

Is this now open to attack under s660a?

Richard Morgan

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By NeilW
19th May 2005 19:16

How long is a piece of string
There is a misunderstanding about what Artic is about. It is not about shareholdings. It is about settlements.

In the Artic case the settlement wasn't the shareholding of the company. It was the artificially low salary taken by the principal employee. This is the settlement that causes 660A to come alive. The shareholding is merely the taxation mechanism by which the income is redirected. If the principal employee had taken a market rate salary, then there would have been no settlement, or at worst a different set of arguments about what the settlement was.

A property company is entirely different, since it earns its income due to the assets, not due to the effort of the shareholder/employee. Therefore S660A(6) should allows you to gift the shares in such a company to a spouse without creating a taxable settlement.

I believe that S660A is being used to attack owner/managed businesses and partnerships where income is redirected to the spouse from the main earner in what HMRC consider to be an 'unfair' manner (ie not paying PAYE tax on everything). Essentially it is a backstop to the failure of IR35. If you're outside that category I don't believe you'll be in the 660A gunsights ... at least not yet.

NeilW

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By AnonymousUser
20th May 2005 12:29

Agree
Would agree with Neils answer - as there are substantial tangible assets I believe your situation is OK.

As an aside, on the issue of not taking commerical remuneration, I've done some analaysis and it seems to me in most cases that for a Husband and Wife PSC on all fours with Arctic, the best option is to leave the salaries low and simply eliminate the spouse shareholdings. Increasing to "commercial remuneration", whatever that maybe, and keeping the spouse shareholding for a smaller element than before seems to cost more.

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