Dividend Classes

richard2511

Hi all.

I run a LTD company as well as working full time for another company. Have done this for 3 years now.

The LTD company is small and has no employees. Just my wife and I as shareholders. I own 51% my wife 49%.

Up till now I have paid myself a dividend which pushes my up to the higher rate tax bracket and my wife then receives a dividend equal to 49% of the overall dividend.

I have read up about dividend classes after speaking to my financial advisor, yet my accountant has advised against it as HMRC may scrutinize it.

What I am aiming to do is pay my wife a larger dividend for the tax year 16-17 as she is currently earning a trainee wage. This is likely to change next year so paying her a dividend at all may not work going forward. As mentioned, my financial advisor does something similar, but my accountant is dead set against me doing this.

Does anybody have any advice. Is my accountant spot on or should I start looking for a new one? I just don't want to miss the opportunity of using my wifes tax allowance as going forward she may not be able to receive a dividend (well without paying 32.5% on it), meaning it will take me even longer to extract the funds in the business.

Many thanks in advance.

Wayne_O_Mac

Your accountant is right.

richard2511

OK, thanks for this.

chrismac1

On the contrary your accountant is pizss poor. I am clearly a different sort of accountant, but my clients must have declared over £1m in different share classes over the past 5 years. Plus my wife has some shares in my own company and has had a few £100k on them, when my son is 18 he will be getting some too.

Really this is box standard stuff and any decent accountant ought to be fine with it, it is what people pay us for. The landmark case on this was Arctic Systems a.ka. Jones v Garnett, you can Google this and you will see that HMRC LOST IT.

But it was a mighty close run thing. Hence my own set up for these share classes is Arctic Systems ++ i.e. it takes the Arctic Systems setup as a baseline and then builds in extra protections on top of that. So to knock my setup down HMRC not only have to overcome the Arctic precedent but quite a bit more besides.

RIGHT NOW what you can do is log in to Companies House and convert those shares of your wife into "A Ordinary". Then find a decent local accoutnant who can set everything up for you properly so you have a robust defence against HMRC and so-called "income shifting".

You really need those share classes in place by 5 April to save tax in 2016-17 tax year.

richard2511

Ah, so that is one person that agrees with my accountant and one that agrees with my financial advisor, hence my confusion.

I think I may scout around and speak to another local accountant and see if they would be able to set something up like you have described chrismac1. As I mentioned, this is only going to be for this one year 16-17 as my wife will be earning a decent wage going forward.

Would it matter the fact that we have already paid out the dividends for the financial year 16-17. We tend to do this in April as we know what our income would be for the coming year anyway?

chrismac1

The tax point for dividends is the date they are declared on a dividend voucher by order of the Board, and minuted as such. I have just in the past week done the 31 March 2017 dividends for all my shareholder clients, myself and my wife.

Whilst not ideal, I think most accountants would be fine with revisiting any dividends already done which were not tax-efficient, unless they already formed part of a set of accounts which had been submitted to Companies House and HMRC.

richard2511

thank you chrismac1.

Think I may start looking for advice from other accountants. As much as I appreciate him trying to protect me, this does sound like a fairly common thing to do and sounds fairly easy to protect me against.

Many thanks for your advice.

chrismac1

Some of my clients have decided not to set up this kind of thing, which is fine by me. In my view my role is not to make the decisions, but to provide advice in order for them to be made and then implement them in full accordance with UK law once they have been made.

TheCyclingProgrammer

As far as I know the main risk from alphabet shares stems from the fact that HMRC have not successfully challenged this setup but may in the future.

However I agree with the gist of what chrismac1 says; the settlements legislation is not very clear cut so all you have to go on is established case law and as he said, the Arctic Case did set a number of precedents. The main one being, that even if there is a settlement of shares between spouses or civil partners (e.g. a gift of shares), so long as that gift is not one solely of income, then the "spouse exemption" clause should apply, meaning the dividends will be taxed on the recipient.

It also established that a gift of ordinary shares that rank equally in terms of voting rights and rights to capital on winding up are more than a gift of income and therefore a gift of ordinary shares should be safe from attack. You can have more than one class of ordinary share.

HMRC have been able to use the settlements legislation to attack this form of income sharing in other ways - for example, they have successfully challenged the use of dividend waivers as a means of paying more dividends to one shareholder than another, arguing that the waiver itself constituted a settlement of income.

It's hard to think of a way that HMRC could attack different classes of ordinary shares though that doesn't mean they wouldn't necessarily try. I don't agree with chrismac1 that your accountant is poor, just perhaps overly cautious. I would have expected them to explain why they thought it would be a risk and let you decide for yourself though.

Personally, I think the risk is very low (settlements challenges don't seem to be on HMRC's radar these days either).

chrismac1

Accountants have to be very careful not to discourage clients from entering into tax-efficient, but legal (and not agressive tax avoidance) transactions. If I were this guy's accountant I would be very carefully checking the wording of my PII cover to see if there was a way my insurers could leave me stuck with any liability for this sort of "advice".

You don't have to look far back for cases where, in my view, the accountants gave much better advice than in this post but still ended up going down in the Courts.

Pennywise

Wayne_O_Mac wrote: »

Your accountant is right.

Please provide a link to statute for your opinion. You can't because there is nothing wrong with the proposal.

As long as the alphabet share structure is set up correctly and as long as all shares carry equal voting rights, HMRC can huff and puff but can't challenge, because nothing is wrong with it.