Quarterly News

Settle for nothing less

You may remember the case of Arctic Systems. It involved a company owned jointly by Mr and Mrs Jones. Whilst Mr Jones did most of the day-to-day work and generated most of the company's profit, the dividends were paid out (in accordance with the shareholdings) equally to Mr and Mrs Jones.

HMRC attempted to assess the dividends received by Mrs Jones on her husband, using a piece of tax legislation often referred to as the 'settlements' legislation. In order for these rules to apply, three conditions are necessary:

• a settlement exists ie an arrangement, understanding or plan;
• there is a tax advantage to what has been done, sometimes referred to as 'bounty' – in particular, whether this was an arrangement which the taxpayer would have entered into with someone with whom he was dealing at arm's length; and
• the person who created the settlement (or their spouse/registered civil partner or minor children) retains some sort of interest in it.

In the Arctic case, the judge held that all of these conditions applied. However, there is an exemption from the rules for inter-spouse transfers, provided that the transfer is not just a right to income. This exemption ultimately protected Mr and Mrs Jones.

Not a great deal more has been heard of these rules until the end of last year, when HMRC were successful in applying the rules to two slightly different situations.

The first case concerned a husband’s waiver of dividends on 9,999 shares with the effect that dividends were paid to his wife, who held one share. The company did not have the distributable reserves to enable dividends to be paid in respect of all of the issued shares; if that were to have happened, the company would have needed some £300m of reserves!

The second case involved a company owned by a husband and wife which issued shares to each of their three minor daughters. HMRC argued that the dividends paid to the three daughters until they each reached 18 constituted income arising under a settlement.

HMRC won both of these cases, so it is important to note that the settlements legislation is not dead. If you have any concerns about these rules, please do not hesitate to contact us.

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