Details of possible approach to Section 660

Extract from Haarmann Hemmelrath UK TAX BULLETIN. This was published in February this year before the Revenue published their examples

WIVES SHAREHOLDINGS

Section 660A Taxes Act 1988 provides that where a person makes a settlement (which includes making a gift of property), any income arising from the property will be taxed on him if the income could become payable to him or his spouse. A special exemption is provided by sub section 6 to exclude from these provisions an outright gift by one spouse to the other unless the property given is wholly or substantially a right to income.

Reports are circulating that the Inland Revenue are now starting to argue that where ordinary shares in a family company are given by one spouse to another (particularly in a company where the donor does most of the substantive work) this represents a gift which is wholly or substantially a right to income.

They might take some encouragement from the case of Young v. Pearce [1996] STC 743 which supported this view in connection with preference shares. That seems fair enough. Where the shares carry a fixed preference dividend but have no votes and no entitlement to a surplus in a winding up it is easy to see that they could represent wholly or substantially a right to income; they certainly have no other significant rights.

However, ordinary shares are quite different. Of course they carry the right to the income but they carry all the equity rights as well. It is not enough to say that there may be not much prospect of long term growth and the donee has no particular wish to exercise the votes on his minority holding. The test is not what the donor or the donee wants or his motives; the test is whether the property itself is wholly or substantially a right to income. Ordinary shares which rank pari passu with the other ordinary shares cannot be said to be wholly or substantially a right to income. The shares represent a bundle of rights and the right to income is not the most important.

It will be interesting to see what happens with this argument – indeed, whether it even sees the light of day.

None of this applies to companies within the IR 35 personal service company legislation because in those cases most of the profits (and in many cases more than the profits) have to be paid out by way of salary to the relevant worker leaving no opportunity of paying dividends to the shareholders.

Anybody concerned about this argument can always achieve the same objective in a different way. He could transfer the shares in the company into joint names on terms that the shares are held beneficially 99% for the husband and 1% for the wife. Providing no election is made under Section 282B TA 1988, the dividends on the shares will be assessed on the spouses equally despite their disparate beneficial interests, without any implications arising under Section 660A.

My thanks to Peter for his permission to publish this extract from the February, Haarmann Hemmelrath UK TAX BULLETIN