Diverting income / 'arrangements' , non-spouse

Any guidance links to show it doesn't work?

Didn't find your answer?

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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By johngroganjga
05th Mar 2019 11:27

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?

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RLI
By lionofludesch
05th Mar 2019 11:31

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.

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Replying to lionofludesch:
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By Tax Dragon
05th Mar 2019 11:35

lionofludesch wrote:

This client is obviously trouble for even thinking about this.

Fair point.

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By Tax Dragon
05th Mar 2019 11:34

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.

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Replying to Tax Dragon:
RLI
By lionofludesch
05th Mar 2019 11:37

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.

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By andy.partridge
05th Mar 2019 11:40

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.

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Replying to andy.partridge:
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By Tax Dragon
05th Mar 2019 11:52

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.

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RLI
By lionofludesch
05th Mar 2019 11:58

Is it the case that your client thinks he's the first to come up with this brilliant idea?

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By Carl London
05th Mar 2019 12:03

@john - yes friend BR and client HR.

The client is actually a very new one and he was dubious about the idea, but he thought it was worth checking with me. I think he will take my advice without additional written guidance, but thought it would good to 'hammer home' the point!!
Thanks all for your comments.

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Replying to Carl London:
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By Tax Dragon
05th Mar 2019 12:44

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.

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Lone Wolf
By Lone_Wolf
05th Mar 2019 12:39

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.

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Replying to Lone_Wolf:
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By lionofludesch
05th Mar 2019 12:44

Lone_Wolf wrote:

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.

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Replying to lionofludesch:
Lone Wolf
By Lone_Wolf
05th Mar 2019 16:45

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.

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Replying to Lone_Wolf:
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By Tax Dragon
05th Mar 2019 17:20

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!)

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Replying to Tax Dragon:
Lone Wolf
By Lone_Wolf
05th Mar 2019 17:30

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.

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Replying to Lone_Wolf:
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By chicken farmer
06th Mar 2019 10:19

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.

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Replying to chicken farmer:
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By FD4CAST FD4CAST
06th Mar 2019 22:54

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).

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By frankfx
05th Mar 2019 13:42

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

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Replying to frankfx:
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By andy.partridge
05th Mar 2019 14:25

Maybe push it a little - £x,xxx?

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Replying to andy.partridge:
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By Tax Dragon
05th Mar 2019 16:22

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.

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Replying to Tax Dragon:
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By andy.partridge
05th Mar 2019 17:07

If the client is wealthy and persistent (and stupid) this is, indeed, what the report should say.

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By Montrose
05th Mar 2019 16:11

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.

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By taxfellow
06th Mar 2019 11:20

In fact I would say that s.624 etc ITTOIA 2005 applies to defeat this - it's an informal settlement.

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By Duggimon
06th Mar 2019 11:31

I see the bill and feathers, and I can hear the quacking, but does anyone have empirical proof this is a duck?

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Replying to Duggimon:
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By FD4CAST FD4CAST
06th Mar 2019 22:56

Before you ask the question, have you seen it walk?

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simson jones
By simsonj
06th Mar 2019 12:03

Second word of advice is off; choose your own first word

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Replying to simsonj:
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By lionofludesch
06th Mar 2019 12:14

In fairness, the OP says the client was sceptical.

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By Justin Bryant
06th Mar 2019 12:16

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.

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Replying to Justin Bryant:
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By Tax Dragon
06th Mar 2019 16:27

"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.)

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By taxfellow
06th Mar 2019 13:34

But not if the bills were joint bills... the burden of proof can be hard to discharge.

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Replying to taxfellow:
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By Justin Bryant
06th Mar 2019 13:46

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.

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By taxfellow
06th Mar 2019 14:07

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.

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Replying to taxfellow:
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By Justin Bryant
07th Mar 2019 11:00

Well, so what? The live-in girlfriend can simply put the household bill in her name only can't she?

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Replying to Justin Bryant:
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By Tax Dragon
07th Mar 2019 12:26

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!)

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