Income Splitting – HMRC Appeal Decision


A recent case shows that HM Revenue and Customs (HMRC) will seek to apply legislation relating to settlements if it suspects couples of income splitting. It highlights the need to take expert advice where various classes of shares are created.
Both the husband and wife had invested half the money required for the start up of a business and set up a share structure involving the issue of different classes of shares. The shares had different rights and varying dividends were paid to each of them over time.
The couple agreed that the wife would receive far fewer ‘A’ shares than her husband in return for her investment. However, she was also issued with some ‘B’ shares, which received dividends in their own right. The husband had day-to-day control of the business but the wife stood to receive far larger dividends than he did. These dividends were paid to her, however, on the understanding that they would be paid across to her husband in order to repay loans taken out to purchase the business. They were both jointly liable for the loans. This somewhat complicated the situation. 
HMRC argued that these arrangements constituted ‘income splitting’ and the effect was to set up a ‘settlement’ for the wife. Income tax assessments were raised to assess the wife’s income as if it were her husband’s.
The court agreed to an extent with HMRC, but did not find anything uncalled-for in relation to the ‘B’ shares as the returns on them were less than the wife’s investment warranted. Although the court did in part support the case put forward by HMRC, the net return to them of £6,000 was considerably less than originally sought.
HMRC recently announced that they intend to appeal the decision.
This case shows the approach that HMRC take to such schemes. If you need advice on any aspects of share structure, <<CONTACT DETAILS>> can help.
Partner Note
Patmore v HMRC [2010] UKFTT 334 (TC). See

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