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Our firm is a typical small general accountancy practice. The partners are aged 51 and 34 and equity is owned 50:50. Turnover and profits have doubled in the past three years and show no signs of slowing down.
We are considering incorporating the practice for tax reasons. Our wives have low incomes and so for regulatory and other reasons we propose to hold the equity shares ourselves 50:50 and create a class of non-voting, non-equity shares which we will also hold 50:50 but jointly with our respective wives.
Our firm is a typical small general accountancy practice. The partners are aged 51 and 34 and equity is owned 50:50. Turnover and profits have doubled in the past three years and show no signs of slowing down.
We are considering incorporating the practice for tax reasons. Our wives have low incomes and so for regulatory and other reasons we propose to hold the equity shares ourselves 50:50 and create a class of non-voting, non-equity shares which we will also hold 50:50 but jointly with our respective wives.
We also propose to retain ownership of the goodwill outside of the new company in order to preserve business asset taper relief on it and also to enable the firm to revert to a partnership structure if the current fiscal benefits of a limited company are diminished. The company will be licensed to use the practice name and client lists. Perhaps before 6 April 2002 the older partner will transfer his goodwill to an interest in possession trust to crystallise retirement relief. Only office equipment would be transferred to the company.
Our questions are:
* By holding the non-voting shares jointly, does section 282A, Taxes Act 1988 prevent an attack under section 660A(6)(b) as in Young v Pearce [1996] STC 743 or under any other provisions? Section 282A(5) gives cause for concern.
* Is it feasible to retain the goodwill outside of the company? Should a licence fee be charged to the company? If so, how is the fee calculated?
* Are there any other angles to consider?
(Query T15,954) - Suffolk.
First, the easy bit: there is no reason why the rights to client lists, practice name and goodwill should not be retained personally and licensed to the company for a reasonable fee - perhaps an annual charge equal to a percentage of the estimated capital value would be appropriate. Whether a disposal of goodwill to an interest in possession trust will qualify for retirement relief is less clear. Presumably reliance is placed on section 163(2)(b), Taxation of Chargeable Gains Act 1992 - disposal of an asset which at the time a business ceased to be carried on was in use for the purposes of that business. But wait! The business has not as a matter of fact 'ceased to be carried on' - it continues to be carried on by the company. Although we are all conditioned to thinking that a change of ownership equals a cessation, the deeming at section 113, Taxes Act 1988 applies only for income tax purposes and does not extend to capital gains tax. There is in fact no cessation and I doubt that a claim to retirement relief is well founded.
What about the shares to wives? As 'Suffolk' fears, section 282A, Taxes Act 1988 is not of itself any protection against a Young v Pearce argument, by reason of section 282A(5). And he could scarcely have hit upon an approach more calculated to provoke the Revenue than to give the wives an interest in non-voting non-equity shares: it is virtually impossible to argue against the proposition that such shares are 'wholly or mainly a right to income' and caught by section 660A(6)(b) of that Act.
It would be far better to arrange for wives to hold an interest in ordinary shares, jointly with husbands. It is true that the Revenue will sometimes try to argue that ordinary shares may still be caught by section 660A(6)(b) - as for example if the company happens to be substantially income generating rather than rich in capital (a consulting business relying on the skills of the husband, for example) - but such an argument goes a long way beyond the decision in Young v Pearce and is not in my view at all well founded, regardless of what the Revenue manuals (an 'interesting but irrelevant ex parte statement of opinion') may say.
Finally, note that section 282A requires only that the property is held in joint names (i.e. regardless of beneficial ownership) and that section 282A(5) bites only if and to the extent that the wife beneficially owns income. If the shares are in joint names but the parties agree that the underlying beneficial ownership is 99 per cent to husband and 1 per cent to wife, the taxable income remains (by section 282A) split equally between husband and wife; and section 282A(5) can apply only to the 1 per cent of the income which is beneficially owned by the wife. - Brass Tax.
These proposals echo the unsuccessful scenario in Young v Pearce, where the profits diverted to the wives as preference shareholders approached 200 per cent of the profits obtained by the husbands through their ordinary shareholdings. That arrangement fell foul of the settlements anti-avoidance provisions.
The absence of a fixed preference for the new shares emphasises the arbitrary character of any dividends to be declared on them, providing ammunition for an attack as a form of settlement. It is agreed that section 282A, Taxes Act 1988 offers little defence.
The arrival of self assessment means that any reaction by the Revenue could be postponed for many years, with penal consequences to the husbands from a successful discovery, perhaps necessitating difficult error or mistake claims by the wives.
Practical illustrations of alternative profit-sharing devices appeared in 'Strategic Business' by Keith Gordon in Taxation, 11 May 2000 at pages 148 and 149. A quotation from the Revenue Inspector's Manual suggests that a 50/50 partnership with the unqualified wives need not depend on working hours (see also 'All in the Family - II' by Graham Funnell in Taxation, 26 August 1999 at pages 559 and 560).
Dividends alone would not absorb personal allowances profitably, so the wives should have a planned salary level. At higher tax rate levels, dividends could equally well adhere to the husbands. - Bear.
