s660 and the settlements legislation (UK)
Sharing ownership of a family company, and using dividends as a means of spreading the withdrawn profits remains a legitimate way of easing the total family tax bill – but as time passes the Revenue are seeking to make doing this more and more of a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.
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
…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.
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.
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 s660 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.
Pre-budget report Oct 07:
5.99 The Government believes it is unfair that some
individuals arrange their affairs to gain a tax advantage by shifting part of
their income, from dividends or partnership profits, to another person who is
subject to a lower rate of tax.
5.100 The Government will be launching a consultation shortly on draft
legislation to prevent such income shifting, with the intention that this
legislation will take effect from 2008-09. The Government aims to ensure,
through consultation, that only arrangements intended to reduce tax, rather than
commercial arrangements, are affected by this legislation and that the
administrative burdens of the legislation are minimised.
HMRC Press Notice:
The Government recognises the contribution that small businesses make to the
economy and that business owners should profit from the success of their
business. However, the Government believes it is unfair for one person to
arrange their affairs so that their income is diverted to a second person,
subject to a lower tax rate, to obtain a tax advantage (income shifting). The
vast majority of individuals cannot shift their income and income shifting runs
counter to the principle of independent taxation.
The Government will be consulting, shortly after the Pre-Budget Report, on draft
legislation to take effect from 2008-09 to address income shifting. The
legislation will work alongside the existing rules on businesses deductions and
settlements, and will seek to remove the tax advantage obtained from income
shifting. It would only apply when the income is in the form of distributions
from a company (dividends) or partnership profits. Income from employment,
interest on savings and any other source will not be affected.
HMRC will draw on the wide range of commercial experience available across the
advisory community in framing practical guidance that minimises burdens, and
makes it as easy as possible for individuals to understand their position.
Relevant factors to consider when establishing whether or not income shifting
has taken place could include the work done by the individuals in the business,
the investments made and the risks to which they are subject through the
business.
Budget 12th March 2008:
These proposals have now been deferred for a year, to allow more time for consultation. They have not gone away, and we cannot yet say in what form they will re-emerge; but for the year 2008-09, the law remains as declared by the House of Lords in the Arctic case.
If you're another lawyer or an accountant reading these pages, I'd be happy to discuss any points arising with you - particularly if you'd like to debate any points where you disagree with my views - mail me!
This page was last updated on 9th October 2007.
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