The settlements (or so called “Section 660”) legislation is tax law which aims to prevent taxpayers from making use of a spouse’s, friend or partner’s tax free allowances.  There is a potential benefit to married contractors due to HMRC losing a case that went to the House of Lords.  If a contractor gifts full voting shares to his spouse then income splitting can be achieved thereby lowering the contractor’s effective tax rate.

The Case

The Arctic Systems case, in which HMRC tried to prove that IT contractor Geoff Jones, the fee-earning spouse in a husband-and-wife-owned limited company, had made a settlement of shares in his company to his wife, a non-fee earner.  HMRC argued that the resulting dividend payments to Geoff’s wife should be treated as his income and taxed accordingly.  Because Geoff’s wife had paid a pound for her shares, HMRC argued that the transfer of shares from Mr Jones was not a gift.  The Law Lords disagreed and unanimously voted in favour of the contractor.

The Consequences – dividend waivers etc

HMRC do not appreciate the opportunity that the Arctic Systems case presents to contractors to legally minimise their tax liability and continue to bring forward cases to further test the Settlements legislation.  HMRC have been more successful in challenging dividend waivers and will seek to show that the gift is wholly or mainly income.

Take advice

The S660 Settlments legislation is not clear and does not allow cut and dried rules to be given.  What is or is not caught by the rules evolves through case law and you should take professional advice to see how it may apply to your circumstances.

Call us on 020 7205 4700 and we will help you navigate through this minefield.

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