Income shifting
The Chancellor announced a further deferral of the proposed ‘income shifting’ legislation in the Budget. However, the ‘settlements’ anti-avoidance provisions are still very much in force and the Revenue is applying them.
In a recent case (Buck v Revenue and Customs Commissioners [2008] SpC 716) Mr Buck owned 9,999 shares and Mrs Buck 1 share in a company. Mr Buck waived the dividends on his shares, which enabled enhanced dividends to be paid on his wife’s share. HMRC argued and won that the dividend waivers constituted a ‘settlement’, and assessed Mr Buck on the enhanced dividends.
The main problem was that there were insufficient reserves to cover the dividend if the waiver had not been made.
In another case (Mr and Mrs Bird v Revenue and Customs Commissioners [2008]), Mr and Mrs Bird were the initial shareholders of a company, owning one share each. The company issued a further 98 shares at par, 19 shares each to Mr and Mrs Bird, and 20 shares to each of their three daughters. Dividends were paid to all shareholders. HMRC argued, and again won, that the dividends paid to the daughters (until they reached age 18) constituted income arising under a ‘settlement’, which should be treated as Mr and Mrs Bird’s income.
Any tax planning of this nature will need to be considered carefully if it is to be effective.
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Cathy Corns is a Tax partner at Mercer & Hole.
