I would be most grateful of any comments forum members have on the following;
One of my clients is a limited company with the following shareholdings
He, a full time working director holds one class A share.
Receives small salary and monthly dividends.
His wife holds one class B share receives no dividend or salary and has no involvement with the company.
Could HMRC question this arrangement?
Replies (6)
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Of course they could
Whether they'd be satisfied with the answer to the question is another matter
Comments?
I wouldn't do anything. You asked if HMRC could question the arrangement. I said that they could, not that they would. Even if they did, I'd be pretty confident in sending them off with their tail between their legs. In any event, HMRC challenge is more likely to be in respect of husband's profit extraction rather than anything to do with the B share.
But there are a number of issues that you need to think about. For instance, depending on what rights the B share has - and therefore affecting its value - a sale of the company may give rise to a gain in wife's hands without benefit of Entrepreneur's Relief. On the other hand, depending on the amount of such gain, the second annual exemption may be valuable.
If you want to transfer the share, I don't see any need to convert it - nothing wrong with a sole shareholder having different classes of share.
yes, but what would the quetsion be?
What would HMRC ask?
Presumably "Why are there different classes of shares?"
Answer "Because that is what was decided by the directors and that is what is registered at Companies House. They wanted different classes of share so as to reflect different rights for different shareholders."
So what happens next?
By having different classes of share your H&W company can pay dividends that are not pro-rata and thus they can be flexible in a tax effcient way. That is, I think, the purpose of them.
Is there a rule against this?