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Replies to Queries — 2

Smith and Jones

Smith and Jones formed a successful specialist engineering company many years ago. Smith gifted, and subsequently bequeathed, his shares in equal numbers to his two children, Peter (my client) and Susan. About 15 years ago, Peter and Susan formally transferred and registered their shares in joint names with their respective spouses, so each married couple currently owns 24 per cent of the company. It is thought that similar arrangements exist for the Jones family's 48 per cent shareholding; the other four per cent is owned by a distant aunt.

None of the Smith shareholders is a director or is employed in any way by the company and without the dividends both would be basic rate taxpayers. However, the annual dividend on their joint holding amounts to around £140,000. Over the years, both Peter and his spouse have each declared 50 per cent of the joint dividend on their tax returns and have always considered the shares to be genuine 'joint property' and not a sham; but what I cannot understand is how the new legislation in section 91, Finance Act 2004 affects my client's tax position. Section 91 seems to say that, with regard to close companies, section 282A(1) will no longer apply, but does not say what will apply in its place. Do I continue as before, or show all the dividends as Peter's? And if not, why not wholly his wife's income instead? Should the holdings be rearranged so that they each own 12 per cent in their own name and would this actually achieve anything?

Readers' comments and suggestions on my client's situation and the new legislation are very welcome.

(Query T16,469)

Issue: 3973 / Categories: