| REVENUE — Income tax — Settlement — Spouses acquiring company to provide husband’s personal services to clients — Each purchasing one share — Wife undertaking administration — Modest salaries paid by company — Whether “settlement” — Whether wife’s dividend payments to be treated as income of husband as settlor — Whether wife’s share outright gift — Income and Corporation Taxes Act 1988 (c 1), ss 660A(1)(6), 660G(1)(2) (as inserted by Finance Act 1995 (c 4), s 74, Sch. 17, Pt 1)
Jones v Garnett (HM Inspector of Taxes) [2007] UKHL 35
HL(E): Lord Hoffmann, Lord Hope of Craighead, Lord Walker of Gestingthorpe, Baroness Hale of Richmond and Lord Neuberger of Abbotsbury: 25 June 2007
A husband who provided his services to the market via a private company which his wife co-owned, thus distributing his earned income between them both via dividend, was not liable to tax on the income transferred to the wife, pursuant to section 660A of the Income and Corporation Taxes Act 1988, provided the wife’s shares in the company were ordinary shares which carried a right to more than just income.
The House of Lords so held in dismissing an appeal by the revenue from a decision of the Court of Appeal (Sir Andrew Morritt C, Keene and Carnwath LJJ) [2006] 1 WLR 1123 allowing an appeal by the taxpayer, Geoffrey Peter Jones, from a decision of Park J [2005] STC 1667, upholding a decision of the special commissioners (Dr Nuala Brice and Ms Judith Powell) [2005] STC (SCD) 9 which dismissed the taxpayer’s appeal (on the presiding commissioner’s casting vote) against a notice of amendment of self-assessment for 1999-2000, whereby dividends paid to the taxpayer’s wife as a shareholder of Arctic Systems Ltd were treated for income tax purposes as the income of the taxpayer as settler.
LORD HOFFMANN said that the arrangement was not a normal commercial transaction between two adults. It made sense only on the basis that the two adults were married to each other. If the wife had been a stranger offering her services as a book keeper it would not have been an arrangement into which the husband would ever have entered. It was only “natural love and affection” which provided the consideration for the benefit he intended to confer upon his wife. That was sufficient to provide the necessary “element of bounty” to make the arrangement a “settlement” for the purposes of section 660A.
However, section 660(A)(6) created an exception for cases in which one spouse made an “outright gift” to the other of the property from which the income arose. It was the husband’s consent to the transfer of a share with expectations of dividend to his wife which gave the transfer the “element of bounty” for the purposes of section 660A. By the same token, it made the transfer a “gift” for the purposes of subsection (6). And there was no dispute that, if it was a gift, it was outright.
The revenue said that the property given, ie the share, was “wholly or substantially a right to income” and thus excluded from subsection (6). But that was not so. It was an ordinary share conferring a right to vote, to participate in the distribution of assets on a winding up, to block a special resolution, etc. Those were all rights over and above the right to income. The ordinary share was different from the preference shares in Young v Pearce (1996) 70 TC 331, which conferred nothing except the right to 30% of the net profits before distribution of any other dividend and repayment on winding up of the nominal amount subscribed for the shares. The instant arrangement fell within the exception in section 660A(6) and, therefore, the husband was not liable to tax on the income transferred to his wife.
LORD HOPE, LORD WALKER, BARONESS HALE and LORD NEUBERGER delivered concurring opinions. |
