HM Revenue & Customs (HMRC) has shown great interest in businesses where both spouses are owners (either as shareholders or partners) but one spouse is considerably less active within the business than the other.
Their weapon was the settlements legislation which HMRC will seek to apply where one spouse (the settlor) enters into an arrangement to divert income to the other spouse and in the process tax is saved. There has to be an element of bounty (i.e. “something for nothing”).
On the face of it, all transfers between husbands and wives could potentially be settlements. However, there is a statutory exemption where property passed to a spouse is an outright gift, unless
The legislation is not new, but was originally enacted in the 1930s and brought up to date in the 1990s.
The well publicised case of Jones v Garnett (Arctic Systems Ltd) was decided in the taxpayers' favour. The House of Lords found that, although the wife's share in the company was a settlement, it was not caught because it had been an outright gift.
It may be helpful to consider the basic situations which may involve income shifting:
The income of the lower taxpayer is taxed as income of the donor of the gift (the settlor).
Until the Arctic Systems case was finalised the application of the settlements legislation was largely untested. Several anomalies had been put forward:
If you are a husband-and-wife business in the Lancashire area, the team at Coates & Co can help you. Contact us today.