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Latest situation post Jones v Garnett

Latest situation post Jones v Garnett

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Can anyone provide a view on the environment we find ourselves in post Jones v Garnett and the splitting of income between spouses as business owners? My understanding is roughly that back in 2007 when this case was settled in the Lords, it was ruled that whilst dividends paid to spouses, say by a service company, are deemed settlements this is over ridden (exempted) by virtue of any share holding of the spouse (wife) in said company being a "gift" from the main owner/contractor (husband).  The government then reacted badly to this suggesting they would be looking at ways to legislate against this as they deemed this income splitting unfair on other tax payers. What has the government done since or imminently planning to do which service company business owners in similar positions should be concerned about undermining the Jones v Garnett ruling.

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John Stokdyk, AccountingWEB head of insight
By John Stokdyk
17th Feb 2014 12:06

I had a quick peek

And ran across an old HMRC guidance page (on the National Archive site) covering 2005-6 and 2006-7 tax returns...

The page helpfully suggested that the Trusts Settlements and Estates Manual had been updated as a result of the Jones v Garnett ruling, but it looks like it might take a big part of the day to work out where and how.

I've put out a call for help on Twitter and hope that a few better informed settlements specialists may see it and come to your aid.

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By sigcima
17th Feb 2014 12:15

Thanks John

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By imbs
17th Feb 2014 12:17

Great question...
Looking forward to a constructive discussion with hopefully a joint approach! Also, what impact does/will GAAR have? Opinions?

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By Steve Kesby
17th Feb 2014 12:43

Nothing's changed

There haven't been any changes as a result of the Arctic Systems case.

You need to be clear about when there is a settlement though and what the settlement is of.

When you give someone shares (on incorporation or later), the settlement is normally the gift of shares (and the rights they carry), not simply any income that may subsequently flow from them.

Where you subsequently alter your position though (eg by waiver or by choosing to pay a higher rate of dividend on one particular class), so that more income flows to those shares than otherwise could, then there is a further settlement of pure income.

The settlements legislation bites whenever a person settles property in such a way that they (or their spouse or civil partner) will benefit from it. There is an exception though, where one spouse makes an outright gift to the other that isn't wholly (or substantially) a right to income.

That was the decision in Jones v Garnett. That an outright gift of shares wasn't the settlement of property that was wholly a right to income, because shares carry with them a basket of rights (to a capital distribution on a winding up, to a vote that might be used to bring about such a winding up, for example). So there was a settlement, but the spousal exception applied.

However, the decisions in Buck and now Donovan, in relation to dividend waivers, and Patmore, in relation to alphabet shares, then show that there may be further settlements through the dividend waiver or the choice to pay different dividends to the different classes.

Those cases have only considered there to be a settlement where the company didn't have sufficient reserves to be able to pay the same rate of dividend to all the shares. That may be because those are the only circumstances in which HMRC argue it though.

In these cases where the dividend waiver (or skewed distribution policy) has been considered to be a settlement, it's been considered to be the settlement of wholly a right to income, so that the spousal exception then doesn't apply.

EDIT: I don't think the GAAR can be of any application, because giving a spouse shares or waiving a dividend in favour of a spouse can reasonably be regarded as a reasonable course of action.

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Replying to lh3f9764bg1g:
By sigcima
17th Feb 2014 15:19

Thanks Steve - a very clearly articulated summary, and useful inclusion of the recent waiver cases too which I certainly had front of mind but had not included in my original question..  I guess my own summary would be then that it appears that the Arctic Systems case, and absence of any further legislation since, still shows a clear path to such owners sleeping comfortably at night receiving dividends in this manner, as long as there is no waiver.  Those of a less risk averse disposition may include the strategy of employing waiver's but only so far as there would be distributable reserves available to pay all cumulatively waived dividends - but this is a far greyer area and one which may end up being fought in court...  ps. what is GAAR?

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By cbp99
17th Feb 2014 12:42

As I recall

Jones v Garnett was decided in the Jones's favour because although there was a gift, the gift was not solely a right to income, because the shares gifted had other rights (to assets on winding-up, and to a vote etc).

The government then intended legislation to override this but nothing has materialised. So my understanding is that Jones v Garnett arrangements are presently acceptable. It is important that the couple is married and not unmarried partners.


EDIT better answer from Steve!

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By Steve Kesby
17th Feb 2014 16:36

The GAAR...

... means the general anti-abuse rule introduced in FA 2013. See HMRC's website HERE.

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By peterdell
18th Feb 2014 00:04

The Donovan result is the most important in a generation, and probably on a similar level to Jones. For this reason. Jones told us what we could do, but there has been a lot of uncertainty and I for one have been careful on those types of business structures. Now we know what the courts won't allow. It sets the parameters. I suspect there will be a case on ABC shares in due course to knock out variable dividends on alphabet structures, but everything else there is a green light for the time being. 

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By davesmith147
19th Feb 2014 15:21

Hi all - I was Malcolm Gammie's number 2 at The Specials in Arctic and on the Legal Team through to the Lords.  Arctic is a much misunderstood case and we won it by the skin of our teeth.  It was only thanks to some interesting word-play by Lord Hoffman that we managed to pull the intra-spousal gift exemption because at the end of the day it wasn't a true gift - Mrs Jones paid a pound and in the High Court Park J would simply not let this be fudged.  In a cruel but amusing it was commented that in return for her pound Mrs Jones got a share - it was her quid pro quo (geddit?!).  The saving factor in Jones will not apply to non-married couples or those in a CP.  Following Patmore, Bingham, Bird, Buck and now Donovan, the settlements trap remains a huge threat to small businesses.  On the other hand, if you fall squrely within the Jones-type scenario, for the time being at least, split away with a clear conscience and a happy heart.  Indeed,despite the Jones result many small companies do not take full advantage of the income-splitting opportunities which remain effective and lawful - Dave Smith, formerly Accountax, now Assured Tax Consulting

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Nichola Ross Martin
By Nichola Ross Martin
24th Feb 2014 12:08

I was asked to comment so here's my comment...

gov't policy is to promote marriage and there would not be an exception to the settlement provisions for an outright gift to spouses were it not parliament's intention that spouses can share their assets. In "Arctic Systems" the House Lords considered the purpose and effect of the legislation and decided that allowing a spouse to subscribe to shares should not be treated any differently to the act of making a gift of shares.

Ordinary shares carry rights to capital as well as income, dividend waivers and "thin shares" such as non-voting preference shares are regarded by HMRC and the tribunals as wholly or mainly rights to income, so this is why the inter-spouse gift does not work in cases like Donovan and you get interesting conclusions in cases like Patmore. He gave his wife some income but retained the capital that was his interest in the share capital.

HMRC did say that they were going to appeal the Patmore decision but they decided against it - as they lost Arctic in the House of Lords it seems a fair bet that they will pick their cases carefully when the shares involved are of the ordinary variety.

Suffice to say, lots of detailed guidance on Income shifting, the Settlement Provisions and making different share classes on our website:

Nichola Ross Martin

Virtual Tax Partner support for advisers and their clients


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28th Feb 2014 16:53

Any views on 100% shareholding in spouse's name

Any views on whether putting a 100% shareholding in a spouse's name would be covered by the Artic Systems ruling and whether any other legislation may come into play.

Eg husband carries out main work, wife is company secretary.  Both are paid salaries approx to NI free limits but wife is 100% shareholder (and has been since incorporation).




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Replying to
Red Leader
By Red Leader
28th Feb 2014 17:11


but happy to be corrected. My view of the status quo:

An ordinary share is more than a right to income and therefore putting such a security in the name of the non-earning spouse comes within the husband and wife get out from the settlement provisions.

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