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Keeping it in the family

Questions were raised at a recent Tax Discussion Group over the tax requirements governing dividends paid to a wide range of family shareholders in a limited company.

February 2019

A recent Tax Discussion Group meeting discussed an accountant’s client query concerning the impact of sharing dividends around a family group and how the accountant should deal with the arising tax enquiry.

The client (A) was the main shareholder in the limited company, a trading business, together with A’s father (B), girlfriend (C), nephew (D), niece (E) as well as his girlfriend’s father (F). A held 75% of the shareholdings, with the others holding 5% each.

The accountant explained that aside from A, none of the other shareholders was a higher rate tax payer. Although all of them worked in the company’s trade, none of them were directors of the company aside from A.

Each year the company had declared dividends in accordance with the above shareholding ratios. These were used to clear A’s indebtedness to the company. The amounts involved exceeded £250,000 over a three-year period.

Although dividend warrants were prepared and provided to the other shareholders, the accountant was not aware of whether any tax returns were submitted by them to HMRC.

HMRC’s enquiry concerned the company and also A. It covered not only the 2015/16 tax year, but also the 2014/15 and 2013/14 tax years as well.

The TDG’s wide ranging discussion covered the personal and company areas below:

  1. s455 CTA 2010, the loan to participators legislation and whether the monies paid to A could be offset against the dividends declared for the other shareholders.
  2. Class 1a Benefits in Kind on the indebtedness that A had to the company
  3. Whether the other shareholders were required to file self-assessment tax returns for their dividend income in these tax years, even where no additional tax liability arose.
  4. Whether A would be liable for additional taxes arising from the enquiry process.

While it was agreed that it would be possible to share dividends around a family group, it was suggested that to be properly implemented the dividends should be declared and paid to the family members rather than being offset via a family loan account.

Each month (with the exception of July and August) the Tax Discussion Groups [TDG] in Croydon & South East London meet to discuss client tax issues on a no-names basis. These meetings are free to attend and normally cover over a dozen tax issues raised by those attending.

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