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Is final whistle about to blow?

Last week, I introduced the latest Inland Revenue contribution to the debate on the tax treatment of dividends received by non-working or insufficiently working spouses and partnership profits received by similarly non- or insufficiently working partners, usually spouses. I would like to look at examples given of where amounts received by the non-worker could, in the Revenue&#39s view, be assessed on the worker under the settlements legislation. The following comes substantially from its Tax Bulletin.

Gifted shares with restricted rights

Mr C is the sole director and owns all the 1,000 ordinary £1 shares in C Ltd. His aunt, Mrs D, has always been kind to him and he wants to thank her. He subscribes at par for 100 B shares with no voting rights and restricted rights to capital of £10 per share in the event of winding up. He gifts the shares to Mrs D and declares a dividend of £100 per share, with Mrs D receiving £10,000.

In the Revenue&#39s view, this is a bounteous arrangement and it would seek to apply the settlements legislation to the dividends. It believes the property giving rise to the dividends cannot be looked at too narrowly and the wider arrangement must be considered. As Mr C is in effective control of the company, he is thought to retain an interest in the underlying property as he could pay all future income to himself as a director&#39s salary or as dividends on the ordinary shares.

Subscribed shares

E Ltd was incorporated in October 1997 to provide the services of Mr E as an IT consultant to clients in the pharmaceutical industry. The share capital is £2, consisting of two £1 shares. Mr E is sole director and his wife, Mrs E, is company secretary but takes no other active part in the company. From the beginning, each subscribed for one share. The company has no significant capital assets.

The figures for the first year&#39s trading are: turnover £100,000, expenses £5,000, salary to Mr E £10,000, salary to Mrs E £5,000, dividends £70,000. Mrs E receives a salary as company secretary but the arrangement whereby she invests £1 and gets a dividend of £35,000 is bounteous, in the Revenue&#39s view. It says there is nothing to suggest the dividend is a commercial return on her investment. As there is no significant capital in the company, what has passed from Mr E to Mrs E is substantially a right to income and the whole dividend is taxed on Mr E.

The Revenue states that the legislation allows it to look at the whole arrangement. It is the work that Mr E carries out which creates the profit which enables dividends to be paid. Mrs E&#39s investment of £1 does not enable the company to make profits and the company has minimal capital value. In accepting a salary below market rate and allowing some of the income earned to pass to Mrs E as a dividend, Mr E has, in the Revenue&#39s view, entered into a bounteous arrangement to divert income to his spouse with the aim of avoiding tax.

Many would consider this conclusion to be flawed where the shares subscribed for carry rights to both capital value and dividends, regardless of the actual value of the business.

Subscribed shares with little capital value then gifted

As in the previous example but Mr E was not married in October 1997 and subscribed for both £1 shares himself. His solicitor was acting as company secretary. A year later, he got married and gave his wife one of his shares. Mrs E became company secretary. The following year, she receives a wage of £5,000 and the company pays a dividend of £35,000 per share.

Since the capital value of the company is insignificant, it appears to be the Revenue&#39s view that the gift of the share is not exempt from section 660A ICTA 1988 by virtue of section 660A(6) as the shares are “wholly or substantially a right to income”. Accordingly, the settlements legislation applies in relation to Mrs E&#39s £35,000 dividend payment and the income would be treated as Mr E&#39s for tax purposes.

Again, many would disagree with this conclusion, which appears to have been reached substantially on the grounds that the value of the company is insignificant and regardless of the fact that Mrs E&#39s shares carry full rights to share in capital value as well as income through dividends.


Mr F and Mr G are in partnership as secondhand-car dealers. They do not have any premises but buy and sell cars through auctions and the classified ads in local papers. Their only assets are office equipment worth less than £1,000 and they usually have a couple of cars in stock at any time. The profits of £80,000 a year are split equally between them. They decide to admit their wives to the partnership and amend the partnership agreement to split profits equally four ways. Mrs F and Mrs G do no work and the partnership has no employees.

In the Revenue&#39s view, this is a bounteous arrangement transferring income from one spouse to the other. The settlements legislation will apply and Mr F and Mr G continue to be taxable on half the profits each. This is a view that has been known for some time.

Dividends on certain shares

Mrs I owns 80 A shares and Mr I owns 20 B shares. Both A and B shares rank equally. Profits of £25,000 are made and a dividend of £20,000 is voted on the B shares while no dividend is voted on the A shares.

The Revenue&#39s view is that this would constitute a bounteous arrangement as the dividend paid on the B shares could only be paid if no dividend was declared in respect of the A shares. Thus, £16,000 of the dividend paid to Mr I is attributed to Mrs I under section 660A because the decision is a bounteous arrangement.

One can understand the argument bringing into play the settlement provisions in some of these examples but there are others where it is hard not to disagree with the Revenue. Next week, I will look at some examples where anti-avoidance legislation will not apply.


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