Avoid the spotlight!
‘Spotlights’ published by HMRC highlight schemes that HMRC has not yet had the opportunity to formally challenge, but where they are indicating, in advance, that they will enquire into any taxpayer who has utilised the planning. If someone uses a scheme which has been highlighted by a Spotlight, it is likely HMRC will argue that a deliberate offence has been committed, so penalties will be higher if the planning is shown not to work.
The recent Spotlight 62 highlights something that is commonly done. The arrangements seek to avoid tax by allowing the directors, who are also the main shareholders of a company, to divert dividend income from themselves to their minor children.
The arrangements work as follows:
- A company issues a new class of shares, which usually entitles the owner of the shares to certain dividend and voting rights;
- Person A, usually a grandparent or sibling of the company owner, purchases the new shares for an amount significantly below market value;
- Person A usually gifts the shares to a trust for the benefit of the company owner’s children;
- The company owners vote for substantial dividend payments in respect of the new class of share;
- this dividend payment is paid to the trustees of the trust; as the beneficiaries of the trust, the company owner’s children are entitled to the dividend.
The company owner’s children pay tax on the dividend received, but much less tax than if the company owners received the dividend, due to their children’s:
- £12,570 personal allowance;
- £1,000 dividend allowance;
- eligibility for the dividend basic tax rate.
HMRC’s view is that this is caught by wide-ranging anti-avoidance legislation and that arrangements which operate in a similar way may also be caught.
If you have entered into any form of tax planning similar to this, we should discuss whether it may be subject to challenge by HMRC
