Does it matter what happens to dividend money paid to spouse, after it's entered their account?

Does it matter what happens to dividend money...

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We know that if a private LTD company has two shareholders, and they are husband and wife, provided the shares are normal ordinary shares and were transferred as a gift, they're safe of settlements legislation.

All the advice I've seen around this says to make sure that dividend payments are paid directly in to individual bank accounts and not in to a joint account.

Would it be a problem if the dividends are paid directly in to each account, but then one partner decides to transfer some or all from their account to their partners?

Eg. 

50/50 shareholding

£5,000 paid to husband in his individual personal account

£5,000 paid to wife in her individual personal account

Wife 1 day later decides to transfer £5,000 to husband's personal account.

Is that just as bad as paying it in to a joint account in the first place, or doesn't it matter?

Replies (18)

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By JCresswellTax
25th Jun 2013 09:09

joint account?

I never see paying dividends to a joint account as a problem as long as the dividends are split in the correct ratio and the proper paperwork has been completed.

To be honest its the first iv heard of this 'joint account problem'.

Am I just out of the loop or is everyone else think like me???

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By nogammonsinanundoubledgame
25th Jun 2013 09:25

Agreed with first response

I get dividends from British Gas, issued to me.  I pay them into a joint bank account held with my wife.  No-one has yet complained.

With kind regards

Clint Westwood

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Chris M
By mr. mischief
25th Jun 2013 10:04

cake and eat it

Am I alone in thinking that the whole self-assessment thing is a Government "cake and eat it" scenario?

When it suits HMRC they like to maintain this farce that husband and wife are somehow two completely unrelated people who should not be sharing anything.  But there again, when it suits them not to think that way - tax credits, removal of child benefits - they send out foms asking for the joint position and taxing accordingly.

WTF?

Make your minds up, people!  No wonder taxpayers get confused.

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By johngroganjga
25th Jun 2013 10:40

I think the issue is with wages to spouses rather than dividends.  I have heard (but never seen it in practice) that HMRC say that wages to a spouse have not actually been paid if they go into a joint account.  They then deny relief because wages in accounts have not actually been paid!

I am more interested in OP's point that if ordinary shares are gifted HMRC cannot argue settlement.  Is that right? 

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Replying to johngroganjga:
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By brianheg
25th Jun 2013 11:45

Ridiculous

johngroganjga wrote:

I think the issue is with wages to spouses rather than dividends.  I have heard (but never seen it in practice) that HMRC say that wages to a spouse have not actually been paid if they go into a joint account.  They then deny relief because wages in accounts have not actually been paid!

If that's true, that's the most ridiculous thing I've ever heard.

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By rand7288
25th Jun 2013 12:11

I'm going on the comment at http://www.contractoruk.com/news/003299.html

(near the bottom)

Avoid paying dividends into joint accounts at all costs. If the Law Lords find in the Jones' favour, then set up your company in the normal way but still avoid banking dividends in joint bank accounts.

 

 

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By Steve Kesby
25th Jun 2013 12:46

Settlements

@ John it is a settlement, but it won't get caught under the settlements legislation because the settlement is a gift of shares and not wholly a right to income, such that the spousal exemption applies, as per Jones v Garnett.

I think once the spousal exemption operates it doesn't subsequently matter what happens with the money; whether it goes into a joint account or the wife let's the husband spend her dividends.

The important point is that the wife has a right (however she exercises it) to the whole of the income but the gift wasn't wholly such a right.

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By johngroganjga
25th Jun 2013 13:08

Thanks Steve

Can I go off at a tangent?  I have a case where male client owns 100% of a successful and profitable trading company.  His long term partner for well over 10 years, mother of his children etc, but not his wife (informally would be called common-law wife) works on any analysis full time in the business as office manager.

I am instructed to advise on merits of gift of 50% shareholding to "wife" to enable dividend payments to her to use up basic rate band.

There are of course various non-tax issues I am advising him to reflect on before proceeding, but the tax issues that I see are:

CGT on transfer - but no problem as gift holdover relief available;Risk of income tax charge on "wife" as employee - not worried as she is receiving shares as mother of donor's children not employee in the company.  No other employees are to be given shares;Risk of settlement attack to make the whole arrangement ineffective - in view of what you say above is this not a concern?  Would it be different of they were married?

 

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By Steve Kesby
25th Jun 2013 14:50

I used to think it potentially applied

I did think that HMRC can potentially apply the legislation in this sort of situation. Any income under the settlement is taxable on the settlor 9by virtue of S.624(1) of ITTOIA 2005), and it applies where:

"S.625

A settlor is treated for the purposes of section 624 as having an interest in property if there are any circumstances in which the property or any related property:is payable to the settlor or the settlor's spouse or civil partner,is applicable for the benefit of the settlor or the settlor's spouse or civil partner, orwill, or may, become so payable or applicable."

Related property includes income.

What stops is for married couples/civil partners is the spousal exemption, which then reads:

"S.626

The rule in section 624(1) does not apply in respect of an outright gift:of property from which income arises,made by one spouse to the other or one civil partner to the other, andmeeting conditions A and B.Condition A is that the gift carries a right to the whole of the income.Condition B is that the property is not wholly or substantially a right to income.A gift is not an outright gift for the purposes of this section if:it is subject to conditions, orthere are any circumstances in which the property, or any related property:is payable to the giver,is applicable for the benefit of the giver, orwill, or may become, so payable or applicable."

I'd have said that the part I've underlined in S.625 caused a potential issue for an unmarried couple, but then it would have caused an issue for a married couple in S.626 because of the part I've underlined there (and hence the advice not to place the money in a joint account), but it didn't in Arctic Systems.

Mr and Mrs Jones paid their dividends (which were paid by cheque) into a joint bank account.

HMRC didn't even argue the point that married (and common law) couples tend to be relatively free with their individual incomes between them. But the alternative view there is that if they had, perhaps they would have won.

However, HMRC's view seems to be that the point only arises in the spousal situation if there is an obligation to apply property to the benefit of the settlor/donor/giver (see TSEM4205). And because the way the legislation is written, the same applies to unmarried couples.

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By asillahi
28th Jun 2013 12:19

Income shifting

We always advise that divs to the wife be paid into her own account and that money shld not be seen to be used for joint purposes like paying the mortgage. This advice is based on previous cases that HMRC have apparently won. It's can become very subjective because peoples' affairs are often arranged in such a way that they share money, costs, etc. but I guess if they can demonstrate that they are not behaving any differently to how they were before it shld be enough. Just another grey area.

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Replying to wperry89:
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By frustratedwithhmrc
28th Jun 2013 13:39

I agree with you in part...

asillahi wrote:
We always advise that divs to the wife be paid into her own account and that money shld not be seen to be used for joint purposes like paying the mortgage.

I agree with you in part, certainly a wifes dividends into her own account is reasonable defence against HMRC claiming dividends are really the wifes as the husband retains control of a joint account. Equally, a wife paying from her account direct to the husbands account, or a mortgage account where the mortgage is not in joint names would be questionable, albeit to a lesser extent.

However I disagree there is a problem with a wife paying from her account direct to the mortgage account where the mortgage is in joint names.

A woman is free to spend her dividend how she chooses, but there is no bounteous settlement in coughing up for half the mortgage surely?

 

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Replying to Channon:
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By asillahi
28th Jun 2013 14:38

@frustratedwithhmrc

The only problem I see in the example you give is that if the wife was not paying into the mortgage account prior to receiving dividends, then HMRC may challenge. There must be lots of cases where the mortgage is in joint names but the wife does not work and therefore pay. As I said, this is where it gets subjective and we advise clients on worst case especially where we have examples of prior cases.

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Replying to happynewyear:
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By frustratedwithhmrc
28th Jun 2013 15:12

Hmmm...

asillahi wrote:
There must be lots of cases where the mortgage is in joint names but the wife does not work and therefore pay.

"From each according to their means, to each according to their needs".

How very Marxist...

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By neiltonks
28th Jun 2013 14:18

This idea of the ownership of the bank account being significant is surely just playing with numbers!

Husband and wife (or any other couple for that matter) both contribute an income to their shared life, so why should it matter which account any particular amount of money is paid to or from? What's the difference between a scenario where the mortgage comes from the wife's account and the other household bills from the husband's, and a scenario where each pays half of the mortgage and half of the other bills?

Are the authorities really reduced to collecting tax based on the manner in which a couple choose to arrange the payment of their household bills??

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By Saxby & Sinden
28th Jun 2013 14:34

And the problem is?

With most of our corporate clients we declare dividends twice a year which are then credited to their Directors Loan accounts.  The client then takes "loan repayments" from their Directors Loan account.

Usually, there is no correlation between the dividends declared and the amounts drawn. 

So interestingly, we keep seperate DLAs for the husband & wife but do not always check to which bank account the loan repayments are credited.

And the problem is?

Alan

 

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7om
By Tom 7000
28th Jun 2013 15:30

I am instructed to advise on merits of gift of 50% shareholding to "wife" to enable dividend payments to her to use up basic rate band ....

 

watch out for employment related securities legislation...you are probably ok as its a gift to a close associate and this trumps being an employee but worth advising client there may be a question.  You may or may not have to fill in form 42

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Replying to C.Y.Nical:
By johngroganjga
28th Jun 2013 15:42

Thanks

Tom 7000 wrote:

I am instructed to advise on merits of gift of 50% shareholding to "wife" to enable dividend payments to her to use up basic rate band ....

 

watch out for employment related securities legislation...you are probably ok as its a gift to a close associate and this trumps being an employee but worth advising client there may be a question.  You may or may not have to fill in form 42

Thanks.  Have assumed that being donor's live-in partner and mother of his children will trump being employee but it is indeed one of the risks I will warn about.  I was more concerned about the settlement issues.

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By birdman
02nd Jul 2013 14:39

Joint accounts

It's interesting that HMRC seem to be inclined towards treating the wife's money paid into a joint account as not actually being paid to her. I have often wondered what would happen in an enquiry if I threw a "sexism" charge at them and asked why they were not querying whether or not the husband's money had actually been paid to him? After all, in many households it's the wife who sorts out the money and where it goes (shoes, handbags etc) ;)

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