Husband and wife own a company 55/45 in his favour. He is the fee earner but the wife does some admin. He's had enough dividends to use up his BR band this year. Wife has about £2k left but has also invested £5k in a SEIS. Hence, she needs some taxable income to utilise the 50% tax relief.
A dividend waiver would work as there are sufficient reserves to pay her the dividend she needs and leave funds equivalent to his waiver in the company. However, waivers are messy as you have to keep track of them and ensure the dividends he would have had are not inadvertently diverted to her in a future distribution. Not sure how long you have to do this for, but there must be a minimum period otherwise you could just get round it by declaring a second dividend straight afterwards.
My original idea was to allot her one B share for a special dividend, but although the share would have voting rights, it would only add 0.99% to her shareholding. I fear it might be vulnerable to a challenge as "substantially a right to income" as it wouldn't really confer much more in terms of ownership rights than she has now.
We could make it 10 shares, but that would give her control of the company which they don't want. Neither are they happy with a 50/50 or near 50/50 split, even though it would be an outright gift of ordinary shares.
I suggested B shares for him and C shares for her giving him control in line with his earning power whilst retaining the flexibility to vary the dividends. However, that means she'd have less voting power afterwards than she did before, which could be construed as the C shares being "wholly or substantially a right to income", thus negating the spouse gifts exemption.
Am I worrying about nothing here or could there be a problem? I always thought ordinary shares transferred between spouses without restrictions couldn't be caught by the settlements legislation, full stop, but when you look at the situation in the round, it doesn't seem so cut and dried.
Any insights?
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I always worry about alphabet shares, and the more of the alphabet that gets used, the more a target I see. I'm sure HMRC would too, and given the drive to maximise tax income, it wouldn't surprise me to see the settlements legislation used, however you interpret it.
Agreed
I always worry about alphabet shares, and the more of the alphabet that gets used, the more a target I see. I'm sure HMRC would too, and given the drive to maximise tax income, it wouldn't surprise me to see the settlements legislation used, however you interpret it.
Alphabet shares can only be attacked if people start taking away voting rights, etc. They're a lot less messy than dividend waivers.
Oh, I don't disagree. I'm not a particular fan of dividend waivers (and especially not recurring but variable waivers). My point was more that just about any structure now comes with a risk.
Wrong
Alphabet shares can only be attacked if people start taking away voting rights, etc. They're a lot less messy than dividend waivers.
Even with full voting rights etc, HMRC have indicated that they might challenge alphabet share dividends if their use amounts to nothing more than a waiver. How likely a challenge, and whether such a challenge would be successful, is another matter.
My (and Portia's) point exactly
Waivers are fine so long as the waived dividend remains in the company and is not distributed to other shareholders. The company must be able to afford the whole dividend if the waiver had not taken place, so if a dividend is declared that uses up all retained profits (or enough to leave insufficient reserves to cover the waived dividend), the waiver is a settlement in its own right, even if the shares themselves are covered by the gifts exemption.
If for example a dividend is declared on B shares that leaves insufficient reserves to cover the same rate of dividend on other share classes you've got a potential problem. Voting rights etc are irrelevant.
The answer would have been to have subscribed for the SEIS shares in the husband's name and then transferred them to the wife.
Nobody noticed the link to Patmore then? Where a dividend paid on the B shares to the wife, was, in effect, treated as being a settlement.
The judge actually started off by saying that the settlements legislation did not apply, but then went on to say that a proportion of the dividends were received by the wife as the husband's constructive trustee (that would be a settlement then!) and so they were taxable on the husband as his income (just like what the settlement's legislation does!).
The issue seems to be
That you want to set something up purely for the sake of giving the wife extra dividends without changing anything else about the company but want HMRC to be unable to challenge on the grounds that it is purely for the sake of giving the wife extra dividends without changing anything else about the company.
I think there's a problem inherent in this situation.
Your up against it then.
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This is all to do with SEIS. I don't think they would want to transfer the SEIS shares into his name just for tax purposes. They're quite risk averse with tax planning in general actually. We'll probably end up going with a normal dividend based on existing shareholdings, which might not be a bad thing with the new dividend tax looming. Doesn't look like they can stay under the higher rate threshold any time soon (not with huge school fees to pay) and they don't want a company loan to tide themselves over either.
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Sounds like your hands are tied. "They're quite risk averse with tax planning"... "don't want to take a company loan" You don't have much to work with by the look of it. Also you have asked for "any insights" but your counter arguments to the insights (problem & solutions) posed by others including the lovely lady seem very well versed.
It also seems like your looking for someone to endorse it when clearly there is some doubt in your own mind over it.
Interesting problem and im watching this thread keenly for my own future reference.
Everyone is lovely when winter finishes
It was a good post. Some very good comments all round.
What are you going to do......... C shares or stay safe?
I'm not interested in Patmore
I was responding only to the erroneous statement that alphabet shares will be attacked only if voting rights etc are removed. The point is that HMRC clearly state that they may look at alphabet dividends if there is any bounty involved, ie if they've been used as an alternative to waivers - the rights attaching to the shares are, in this context, quite irrelevant. Have a look at example 13 at TSEM4225.
Reclassify H&W shares
Why not reclassify shares as A & B shares so H gets 55 A and W gets 45 B. Both A & B rank pari pasu except for dividends where by a different dividend can be paid to each class of shares.
WHAT IS THE PROBLEM WITH A WAIVER?
"A dividend waiver would work as there are sufficient reserves to pay her the dividend she needs and leave funds equivalent to his waiver in the company. However, waivers are messy as you have to keep track of them and ensure the dividends he would have had are not inadvertently diverted to her in a future distribution. Not sure how long you have to do this for, but there must be a minimum period otherwise you could just get round it by declaring a second dividend straight afterwards"
The professional fees for a waiver[ which can be expressed as applying only to dividends payable for a predetermined short period] are less than for creation of alphabet shares.
There is no problem with successive waivers , provided at each declaration there are sufficient funds and distributable profits to pay the dividend declared [as xp per share] to all shareholders.