s660 and the settlements legislation (UK)

Section 660A ICTA and the family company

Introduction

Sharing ownership of a family company, and using dividends as a means of spreading the withdrawn profits remains a legitimate way of easing the total family tax bill – but as time passes the Revenue are seeking to make doing this more and more of a minefield.

Unless proper care is taken, individuals who have a company in which others also hold shares and from which those others receive dividends could (quite unnecessarily) find themselves having to pay income tax themselves (and at their own highest rates) on those dividends which have been received by others.

Basic principles

The basis principle is that you cannot be taxed on income which is not your income, unless some statutory provision so provides.

However, s660A & s660B ICTA create such provisions, and can make a person liable for income tax on the income of someone else; these rules and their impact also depend on the relationship with Recipient, and the sections will apply as follows:

Income arising under a settlement during the life of the settlor is treated and taxed as the income of the settlor if any of the following apply:

Recipient: Settlor’s unmarried minor child:

…if it is paid to or for the benefit of (or otherwise treated by tax law as if it were so paid) such child

Recipient: Settlor’s spouse:

…unless it arises from an outright gift, unless (a) the gift does not carry the right to the whole of that income, or (b) the property given is wholly or substantially a right to income; or

…unless the income consists of (a) annual payments made by an individual for bona fide commercial reasons in connection with his trade, profession or vocation, (b) certain charitable payments, or (c) benefit under approved pension scheme.

Any other Recipient:

…unless it arises from property in which neither Settlor nor settlor’s spouse retains an interest; or

Terms and expressions in bold have special or defined meanings, or have been the subject of interpretation in case law.

Note that the above is paraphrased for ease of getting a basic understanding; to understand the detail, there is no substitute for looking at (and taking the trouble to understand!) the sections themselves.

Bottom line: if you are primarily responsible for making the money, and someone else gets some of the income by way of dividends, then you are potentially at risk.

Our services

Husband and wife can still use shared ownership of a family company to reduce their tax bills – they just have to be a little more careful about the way in which they do so!. The Revenue’s current attitude means that it has now become crucially important for the realities of what generally happens (genuine joint control, joint effort, and equal ownership) to be properly reflected in the underlying structure – and to ensure that is done properly, most will now need to take proper advice from a professional who has some understanding of the legislation and the case law.

If there is a legitimate way of avoiding income being caught by these sections, then proper structuring of the commercial venture generating the income is crucial.

In most situations, we can offer advice on the likely impact of s660A and (where practicable and legitimate to do so) on steps to secure the position.

To proceed

· · we will need you to complete and return our questionnaire;

· · we will then consider your responses,

· · we will schedule a discussion with you, and

· · after the discussion we will summarise our advice in writing.

Changes afoot?

Maybe, but for the present, the law remains as declared by the House of Lords in the Arctic case

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This page was last updated on 27^th June 2011.

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