HMRC has given its view on an avoidance scheme which seeks to reduce or avoid tax on income used to pay (sometimes very significant) private school fees: the scheme does not work.
Spotlight 62Dividend diversion scheme used to fund education fees appears to address the recent reports by Tax Policy Associates of the widespread use of tax avoidance schemes by owner-managed companies.
The scheme creates a special class of shares in the taxpayer’s business which is subscribed to by a family member at an artificially low price, and with the dividends being settled on trust for the taxpayer’s children – thus taking advantage of the children’s personal allowance and basic rate band and potentially saving £100,000s in tax over a number of years (compared to the tax position if the taxpayer simply paid the fees out of their own post-tax income).
HMRC says that the scheme has no effect, because the arrangements are caught by the anti-avoidance settlements legislation in ITTOIA 2005 s 619 onwards. As HMRC’s Trusts, Settlements and Estates Manual (at TSEM4015 onwards) summarises: ‘The settlements legislation is intended to prevent an individual from gaining a tax advantage by making arrangements which divert his or her income to another person who is liable at a lower rate of tax or is not liable to income tax. It applies only where the settlor has retained an interest in the settled property or income.’
Although HMRC’s spotlight document takes something of a broad brush approach, outlining that these and other similar arrangements are likely to be caught by the legislation, it is worth noting that s 629 specifically treats income paid to or for the benefit of the children of the settlor as ‘the income of the settlor and of the settlor alone’.
HMRC has given its view on an avoidance scheme which seeks to reduce or avoid tax on income used to pay (sometimes very significant) private school fees: the scheme does not work.
Spotlight 62Dividend diversion scheme used to fund education fees appears to address the recent reports by Tax Policy Associates of the widespread use of tax avoidance schemes by owner-managed companies.
The scheme creates a special class of shares in the taxpayer’s business which is subscribed to by a family member at an artificially low price, and with the dividends being settled on trust for the taxpayer’s children – thus taking advantage of the children’s personal allowance and basic rate band and potentially saving £100,000s in tax over a number of years (compared to the tax position if the taxpayer simply paid the fees out of their own post-tax income).
HMRC says that the scheme has no effect, because the arrangements are caught by the anti-avoidance settlements legislation in ITTOIA 2005 s 619 onwards. As HMRC’s Trusts, Settlements and Estates Manual (at TSEM4015 onwards) summarises: ‘The settlements legislation is intended to prevent an individual from gaining a tax advantage by making arrangements which divert his or her income to another person who is liable at a lower rate of tax or is not liable to income tax. It applies only where the settlor has retained an interest in the settled property or income.’
Although HMRC’s spotlight document takes something of a broad brush approach, outlining that these and other similar arrangements are likely to be caught by the legislation, it is worth noting that s 629 specifically treats income paid to or for the benefit of the children of the settlor as ‘the income of the settlor and of the settlor alone’.
