His wife is a basic rate taxpayer. So as to reduce the overall tax the couple pay, would it be possible for him to transfer some of his shares into his wife’s name, such that she receives the dividends?
A: This situation would fall under the rules relating to settlements. The word ‘settlement’ has a wide meaning. A settlement can encompass situations where a transfer of income or assets has been made without the legal formalities of a trust. Settlements are defined as any “disposition, trust, covenant, agreement, arrangement or transfer of assets”. Therefore, a simple transfer of assets between persons could be regarded as an ‘arrangement’, falling foul of the settlements legislation, especially if either the ‘settlor’ of this arrangement or his spouse / civil partner can benefit from the property transferred.
The rules for settlements are in place to prevent an individual from gaining a Tax Advantage by arranging to divert their income to a family member (or friends). Under certain circumstances however, a transfer between spouses may be acceptable, providing certain conditions are met. As stated in HMRC manuals (TSEM4355), “if there is no ‘bounty’ or if the gift to a spouse or civil partner is an outright gift which is not wholly, or substantially a right to income, then the legislation will not apply”.
When considering this course of action, it is important to ensure that the shares transferred carry the same rights. Where ‘alphabet’ shares are created with restricted entitlements to capital or different dividends, then that may be considered to be caught under the settlements legislation.
Shares transferred with no capital entitlement are considered to be a bounteous arrangement and solely and only created to dilute income away from the original owner. Those shares that carry no voting rights effectively give the settlor an interest in the asset.
Assuming that all the shares are equal in every way, it is then important to ensure that the higher earner does not waive his entitlement to dividends on a habitual and regular basis. That arrangement, without good commercial reason, for retained profits to be held in the company, may also be caught by the anti-avoidance legislation.
It is therefore possible to undertake the transfer provided full consideration is given to ensure none of these apply:
• Shares subscribed at par that carry only restricted rights
• Shares given away that carry only restricted rights
• A limited share in a partnership gifted or transferred below value
• Dividend waivers
• Situations where dividends are paid only on certain classes of shares
• Dividends paid to the settlor’s minor children.
Ben Chaplin is managing director of Taxwise