Call us on 020 7251 8690|
|
 Private Limited Company Shareholdings and S660A LegislationWritten by Sally Fletcher for planIT, October 26th 2011
The company will be incorporated under the laws of England and Wales or Scotland, dependant upon its registered office address. Prior to 2009 most companies were incorporated with an authorised share capital of 1,000 and any number of shares up to 1,000 could be issued to specific private shareholder/s. Shares cannot be offered to the public in general. From 2009, the concept of authorised share capital was scrapped and now any number of shares may be issued. Usually new shares are issued at a nominal value of £1 each and the shareholder pays the company the face value of the shares. The shareholders have limited liability effectively limiting their financial liability to the amount that they have invested in the shares. Unless personal guarantees have been given to lenders, or other creditors, all financial claims must be made against the limited company, not the investors. If the limited company were to become insolvent, the investors would lose the value of their investment but their personal assets would be protected. There are several types of shares but the most common 2 are: Ordinary shares Ordinary shares carry full voting rights and a right to dividend and capital distributions in the company. They do not have any special rights or restrictions. They may be divided into classes of different values. They can be classed as irredeemable (the company may not buy them back). Preference shares Preference shares have a preferential right to dividends or capital distributions above ordinary shares. They are often issued with either restricted, or no, voting rights.
The shareholders (also known as members or subscribers) own the company. They appoint the director(s) to run the company on their behalf. Usually with personal service companies (PSC's) the director will be the shareholder although there is no legal requirement for this. Shareholders owning 10% or more of the company will be required to satisfy anti-money laundering regulations with the company bankers. There are no restrictions on who can be a shareholder and they can be resident in any country.
A shareholder has a right to receive dividend distributions from the company profits after corporation tax. Dividends are classed as unearned income as they are a reward to the investors in the business. However, they do count towards income for personal tax purposes. When a dividend is distributed, each shareholder is paid according to their shareholding. It is possible for a shareholder to waive the right to a dividend, known as a dividend waiver, so that the other shareholder receives the whole dividend, provided there are sufficient retained profits to have paid all shareholders. This has its risks, as, under the settlements legislation, HMRC may consider that the waiver was to create a tax advantage. Therefore planIT advises careful consideration before proceeding with a dividend waiver.
To maximise tax planning opportunities, companies with an expected annual net profit of £40,000 or above may wish to consider an additional shareholder. A director who has a spouse or civil partner who has a low (any amount below £42,475 in the 2011-12 tax year), or no income, can issue ordinary shares to them to utilise their lower tax threshold allowances. These should be ordinary shares with full voting rights in the company. In 2011-12, a combination of gross dividend income and gross salary up to £42,475 (made up of £7,475 personal allowances and the basic rate tax threshold of £35,000) can be received by an individual and they will not be liable for personal tax. With an additional shareholder this doubles the amount to £84,950.
Section 660A is a part of the Settlements Legislation from the 1930's but became legal precedent with the rulings made in the Arctic Systems (Jones V Garnett [2007] STC 1536) case. The Section is still known as S660A but was re-written and applies from 2005/6 onwards. It can be found in The Income Tax (Trading and Other Income) Act 2005 (ITTOIA) section 625. Originally the rules were intended to prevent an individual from gaining a tax advantage by making arrangements which divert their income to another individual who is liable to tax at a lower rate or who is not liable to personal tax. The arrangements in the context of this article would be issuing shares to another individual known as share-splitting.For the settlement legislation to apply, the arrangement needs to be:
Where there has been an actual investment made in a limited company by a shareholder, and that shareholder is receiving income that is proportionate to their investment, then S660A rules do not apply. However, if the settlor had retained an interest in the settled property (shares) or income, for example, the shares would be passed back to the settlor at a later date, the legislation would apply. Preference shares would be caught as they carry a preference over ordinary shares and usually have restricted rights.
In 1992, Mr Jones, an IT consultant, purchased an "off the shelf" company, gave one share to his wife and kept the other for himself. Mrs Jones was appointed as Company Secretary (no longer a requirement) and prepared the company book keeping records approximately 5 hours per week for which she was paid a market rate salary. Mr Jones was appointed as a Director and was also being paid a small salary. The profits in the company were distributed equally as dividends to Mr and Mrs Jones. HMRC argued that Mrs Jones's dividends were disproportionate to the work that she contributed to the business and raised an assessment on Mr Jones treating the income as his on the basis that it represented a settlement under ICTA 1988, S660A and that it was taxable under ITTOAI 2003, S624. Mr Jones appealed the decision claiming that the distribution of dividends was not a settlement and that the share had been gifted to his wife. The case was heard by the Lords of Appeal in the House of Lords, Lord Hope concluded: "an arrangement by which one spouse uses a private company as a tax-efficient vehicle for distributing to the other income which its business generates is likely to constitute a "settlement" on the other spouse within the meaning of section 660G(1) of the 1988 Act. But so long as the shares from which that income arises are ordinary shares, and not shares carrying contractual rights which are restricted wholly or substantially to a right to income, the settlement will fall within the exception created by section 660A(6). This is an important point of general public interest on which I should like to add these brief comments. The rights which attach to shares in a company depend on the contractual relations between the holders of those shares as defined by the articles of association of the company. It is the articles of association that determine questions between ordinary and preference shareholders as to the right to income in the form of dividends, and the right to the repayment of capital and to participate in the distribution of surplus assets in the event of a winding up of the company. They also determine questions as to the right to attend and to vote at general meetings of the company. The general rule is that the profits of a company belong to the ordinary shareholders, subject to the payment of any preference dividend. Then there is the question how surplus assets not required for the discharge of the company's liabilities or the return of paid up capital to the shareholders are to be distributed in the event of a winding up. The rights of the preference shareholders in any particular case will depend on what the articles of association provide. This is because the rights of the shareholders are determined by the terms of the bargain which they made with the company and with each other". Therefore in conclusion, providing the shares issued to a spouse or civil partner are ordinary shares that carry full voting rights and rights to dividends and capital distributions, then the Settlement's legislation will not apply. All private limited companies incorporated by planIT Services Ltd have the following rights in the Articles of Association: "Ordinary shares are irredeemable and have full voting rights in the company with regard to voting, dividend and capital distributions". The legislation was to be amended in the Finance Bill 2009, but to date it remains unchanged.
We would strongly advise that you
take advice from planIT before issuing shares to a spouse or civil partner.
|
