Limited company shareholders - income shifting??

[LLP76]

Hi apologies for this being long winded I have done lots of research lately on this but I'm still at a loss as to my situation!
I am a 1/3 shareholder in a Limited Company with my parents. The Limited company was set up as part of a mixed membership LLP of which I am a partner. As was normal until April last year when mixed partnerships became no longer possible, some of my profit share from the LLP was allocated to the Limited Comapny. So far no dividends or salary have been taken. When the Limited comapny was set up my accountant advised me I could have my semi-retired parents as 1/3 partners as they would do odd jobs (unpaid) for the LLP and pay them dividends. I have now become aware of the term 'income shifting' and I'm concerned whether my situation constitutes this. As mixed partnerships are no longer possible the Limited Company is no longer of benefit. However, as I see it to extract the remaining (£46k after corp tax) we would all have to take dividends and then then could be take the remaining £25k split 3 ways as a capital gain. I am wandering whether their shares should just be reassigned to me (to avoid accusations of income shifting) or whether we should just leave the shares as they are and hope for the best. I am concerned that if their shares are reassigned to me before closure of the company this will look even suspicious to HMRC. Any advice would be appreciated.

Thanks

[northernladuk]

I know people hate me asking this and doesn't bring much to the discussion but why are you not asking your accountant about all this?

[LLP76]

I know people hate me asking this and doesn't bring much to the discussion but why are you not asking your accountant about all this?

Good point. I have discussed the income shifting rules and Arctic Systems case with my accountant. He has told me that this should be ok with parents too as long as all the paperwork is in order. This was his suggestion in the first place, not mine. I'd just like other opinions rather than just going with what he said.

Thanks

[TheCyclingProgrammer]

Unlikely to be caught if the dividends go to them and stay with them. But is that what you want?

If you want the profits for yourself then it would be prudent to get the shares back first. Whilst they can strictly do what they want with their dividends, including gifting them to you, if there's any indication that this was pre-arranged it could cause a problem if HMRC got wind of it.

You don't say much about the background of your business so it's hard to say much more than that, but settlements legislation is generally geared towards settlements made between spouses (unless the exemption applies) and to minor children, or into trusts where the settlor retains a beneficial interest, in order to gain a tax advantage.

It's not normally designed to catch transfers between unconnected persons, unmarried partners or other family members although it can potentially apply to a transfer between any two people, largely due to the broad way in which the legislation is worded. But HMRC guidance backs up the view that they generally see it as applying mainly to spouse/minor children/trust situations.

If you want to have the shares transferred back to you and keep all the dividends for yourself then that's fine but I think you would need some advice on any potential CGT/IHT implications.

[LLP76]

Unlikely to be caught if the dividends go to them and stay with them. But is that what you want?

If you want the profits for yourself then it would be prudent to get the shares back first. Whilst they can strictly do what they want with their dividends, including gifting them to you, if there's any indication that this was pre-arranged it could cause a problem if HMRC got wind of it.

You don't say much about the background of your business so it's hard to say much more than that, but settlements legislation is generally geared towards settlements made between spouses (unless the exemption applies) and to minor children, or into trusts where the settlor retains a beneficial interest, in order to gain a tax advantage.


It's not normally designed to catch transfers between unconnected persons, unmarried partners or other family members although it can potentially apply to a transfer between any two people, largely due to the broad way in which the legislation is worded. But HMRC guidance backs up the view that they generally see it as applying mainly to spouse/minor children/trust situations.

It's certainly not designed to catch normal family business scenarios and I'm not aware of HMRC using it in those cases.

No I'm quite happy for the dividends to stay with them I've no wish for them to hand it back to me. However they were concerned eg if I were to get married they'd never be able to give me and my girlfirend any money ever again for fear of a tax investigation.

With regards to the LLp it is a small company of which I own a third. it is not a family business. My parents have only ever done odd jobs for us (eg dad painting office). The Limited company to which me and my parents share 1/3 took a share of the LLP profit (hope this makes sense). The remaining LLP profit was allocated mto me personally.

[TheCyclingProgrammer]

No I'm quite happy for the dividends to stay with them I've no wish for them to hand it back to me. However they were concerned eg if I were to get married they'd never be able to give me and my girlfirend any money ever again for fear of a tax investigation.
.

This isn't a simple subject, but the key things are:

1. Was there a settlement? In your case probably yes as your parents essentially got a share of your business for nothing.
2. Does the settlor (you) retain an interest in the shares?

The second question has no definitive answer but HMRC would normally consider the answer to be yes if the settlement/gift was made with strings attached or there was some kind of arrangement for those shares or any derived income (dividends) to be returned to you or directly benefit you or your spouse, if you have one, and to gain a tax advantage.

If you genuinely intended for them to have a share in the business, keep those shares, the dividends and enjoy a capital distribution on winding up for no reason other than generosity then its unlikely HMRC would consider you retained an interest IMO.

I also wouldn't worry about your parents giving you genuine gifts of money at some arbitrary point in the future of their own free will. That is not an arrangement.

But that is just my opinion and you'll likely find many on here. If I was in your situation, I wouldn't worry too much about it.

Out of curiosity, why did your accountant recommend giving your parents a share in the business in the first place? If it was for tax planning reasons, then it's not really very effective as you don't take home any extra cash as it's going into your parents pockets. Unless of course you always intended for their dividends to be diverted back to you - exactly the sort of thing the settlements legislation IS designed to prevent.

[LLP76]

This isn't a simple subject, but the key things are:

1. Was there a settlement? In your case probably yes as your parents essentially got a share of your business for nothing.
2. Does the settlor (you) retain an interest in the shares?

The second question has no definitive answer but HMRC would normally consider the answer to be yes if the settlement/gift was made with strings attached or there was some kind of arrangement for those shares or any derived income (dividends) to be returned to you to gain a tax advantage.

If you genuinely intended for them to have a share in the business, keep those shares, the dividends and enjoy a capital distribution on winding up for no reason other than generosity then its unlikely HMRC would consider you retained an interest IMO.

I also wouldn't worry about your parents giving you genuine gifts of money at some arbitrary point in the future of their own free will. That is not an arrangement.

But that is just my opinion and you'll likely find many on here. If I was in your situation, I wouldn't worry too much about it.

Thank you. This is exactly what my accountant said. Having supported me through university I have no interest in receiving any money from my parents. However it was them who were concerned should they ever wish to make gifts in the distant future eg for weddings grandchildren etc.

[TheCyclingProgrammer]

Thank you. This is exactly what my accountant said. Having supported me through university I have no interest in receiving any money from my parents. However it was them who were concerned should they ever wish to make gifts in the distant future eg for weddings grandchildren etc.

Also, whilst I do genuinely believe you wouldn't be caught, also consider the likelihood of HMRC even querying this in the first place. Pretty slim, I'd say. Settlements cases have been few and far between since Arctic and the failed attempt to introduce the family business tax stuff - the few that HMRC have won have again been cases of settlements between spouses where the spouse exemption did not apply (dividend waiver cases).

Not that liklihood of investigation should be your main consideration when doing anything tax related but if your motives are genuine and not motivated by tax avoidance I certainly wouldn't lose much sleep over it.

[mudskipper]

It'll be interesting to hear the accountants' views on this one.

If your parents weren't shareholders, would you be supporting them from your post-tax income? If so, it could be considered that the situation is giving you a tax advantage. It seems an odd arrangement - the 'jobs' your parents are doing sound like a justification - if you need a justification, it doesn't sound like a genuine arrangement. But hopefully the accountants will be along with an opinion.

[TheFaQQer]

It'll be interesting to hear the accountants' views on this one.

If your parents weren't shareholders, would you be supporting them from your post-tax income? If so, it could be considered that the situation is giving you a tax advantage. It seems an odd arrangement - the 'jobs' your parents are doing sound like a justification - if you need a justification, it doesn't sound like a genuine arrangement. But hopefully the accountants will be along with an opinion.

That would be my impression as well - if you were ever likely to support them from your income, it looks like this is a tax dodge.

But as TCP says, chances of getting caught, even if it is, are low.