Client has been advised he can give 'B' shares to a friend, pay dividends to them and then get them to pay them straight back to him.
Clearly this is an arrangement which would not work if HMRC knew all the facts.... I would like to give my client a link to guidance which confirms this, but I can't seem to find anything.
Does anyone know where I could find something?
Thanks in advance!
Replies (34)
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Give them straight back after deducting the tax payable on them you mean? Leaving aside whether the arrangements work, what is the point of them? Friend having a lower marginal tax rate perhaps?
What if the friend runs off with the money ?
Setting aside the tax fraud issue, what's in it for him ?
Crazy idea but disengage. This client is obviously trouble for even thinking about this.
How do you “get” someone to pay you something if they don’t have to? If they don’t have to, why would they? If they do have to… well, I’m sure you can work that one out.
“Clearly this is an arrangement which would not work if HMRC knew all the facts....” So tell HMRC all the facts and let them challenge the arrangement.
There's the answer.
Tell the client you'll ask HMRC whether it's legit.
I'll lay good odds against him taking it further.
You would like to give your client a link . .
Your problem is that you think the client trusts the bloke down the pub more than you. Think about it and then, if you agree, think what you have to do to correct that. Believe me, it's nothing to do with supplying a link.
Another fair point. You might notice that bigger firms of advisors don’t provide links for clients to check their advice; they trust their own advice. They presume that, with all the training they’ve had, they can understand the rules better than their untrained clients can. That’s not arrogance; it's common sense.
If the client doesn’t trust the advice, they can stop taking it.
Is it the case that your client thinks he's the first to come up with this brilliant idea?
Don't be fooled by that. He's testing you out. And it's a shame you didn't just laugh "yes of course that doesn't work!" straight back at him. Now you feel like you need to explain yourself.
Wouldn't this situation effectively create a bare trust?
The friend in such an arrangement the friend is purely holding the shares as a nominee, and any dividends declared merely pass through them and straight to your client putting him in the exact same position as declaring the dividends himself.
Wouldn't this situation effectively create a bare trust?
The friend in such an arrangement the friend is purely holding the shares as a nominee, and any dividends declared merely pass through them and straight to your client putting him in the exact same position as declaring the dividends himself.
Well, there's that. Plus it's an outright sham.
True but I tend to find client's don't respond too well to simply saying something is a sham (even when it clearly is). Laying out to the client that the proposal presents the following options:
1 - there is a bare trust which puts him in the same position tax wise; or
2 - the friend has no obligation to pay him over the money and could quite easily walk away as soon as the dividend is paid to him.
I believe they are more likely to listen to the advice than merely saying it is a sham.
It's (at most) a phone call, though, right? If not just an aside the next time you happened to be talking (and maybe even then only if the client raises the subject again).
You’re not advocating taking time out to give a full reasoned technical analysis? (Having said which, it’s interesting that the question has given rise to at least three completely different technical analyses… and I’m not convinced any of them is 100% right!)
Not at all, a phone call or a quick email just to give a reason why the suggestion doesn't have any merit would do. It at least lets them know you're not just fobbing them off by saying it won't work.
Yes it would. Client would not have divested himself of the beneficial ownership.
A practical point is that if friend dies unexpectedly, his executors will however think that the deceased had beneficial ownership and seek to distribute the shares. Could get very messy.
Not if it's an "Alphabet Share" with discretionary dividends, e.g:
FULL RIGHTS TO RECEIVE NOTICE OF, ATTEND BUT NOT TO VOTE AT GENERAL
MEETINGS. ONE SHARE CARRIES RIGHTS TO DISCRETIONARY DIVIDENDS ONLY AS
DECIDED BY THE COMPANY DIRECTORS AND TO CAPITAL DISTRIBUTIONS (NOT
INCLUDING UPON WINDING UP).
Shares could be distributed by executors to all and sundry but unless a discretionary dividend paid then the shares are worthless (unless, of course, the inheritor recipients are also in on the sham....unlikely I know).
Dear client,
With all my knowledge and experience and desire to minimise my own tax burden I do not use the 'solution' you propose.
No other accountants, as far as I am aware , use this technique.
Furthermore no tax consultant has ever suggested or promoted it as an off the shelf, no brainer tax saving plan.
If you are willing to pay a fee of £xxx I am prepared to research the matter and provide a formal report.
I look forward to hearing from you.
yours
IMHO, that justifies the client asking. Something this basic(*) should have been dismissed immediately, as I said before.
(*) It relies (as the OP said) on not telling HMRC the facts. ANY plan that relies on not telling HMRC the facts is close to, if not actual, evasion.
If the client is wealthy and persistent (and stupid) this is, indeed, what the report should say.
If the friend is bound to pay the dividends to the client, then this is a settlor interested trust and your client would be deemed to have receive the dividends him/herself-so no tax saving.
Even if the is no obligation, this is still an "arrangement" and the same result would flow- see ITA 2007 s.465.(8)..... “arrangements” includes any scheme, agreement or understanding, whether or not legally enforceable.
In fact I would say that s.624 etc ITTOIA 2005 applies to defeat this - it's an informal settlement.
I see the bill and feathers, and I can hear the quacking, but does anyone have empirical proof this is a duck?
If this was his live-in girlfriend (or boyfriend) it would probably be OK to the extent she used it to pay household bills etc.
"Probably" means it goes on the list of things to tell HMRC.
(And if, as I have said elsewhere, HMRC ever gets its act together [using existing law - no changes needed] on alphabet shares, any question of whether your "probably" is right will become redundant.)
Why do you say joint bills are a problem? She's living in the house and has to pay her way etc. and it's joint and several liability normally in any event for joint bills and overdrafts etc.
If the money is used to pay a joint liability that would otherwise fall to him to pay, then it is hard to see how the money is not 'applicable for the benefit of the settlor': s.625(1)(b). The language is deliberately very broad in its application.
Well, so what? The live-in girlfriend can simply put the household bill in her name only can't she?
Never mind the tax issues here, we seem to be learning a lot about you, Justin. Let’s just say I’m glad I don’t live with you. (I fully respect that that sentiment is mutual!)