Paying dividends to parents. Is this legal?

Paying dividends to parents. Is this legal?

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Zigster

Original Poster:

1,636 posts

143 months

Tuesday 14th October 2014
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In the pub a few nights ago, a friend (yes really – definitely not me as I’m PAYE) explained that he has given his ex wife and his parents shares in his business. He pays his ex wife dividends from the business in lieu of maintenance and he notionally pays his parents dividends – i.e. they get a tax slip in respect of the dividends as if it is their income but the money is paid direct into his bank account.

Doing this uses up his personal allowance and 20% tax band plus uses up any slack in his ex and his parents’ 20% tax bands. They all have income but none of them are 40% tax payers. So, based on a low six-figures income each year (I don’t know the exact amount) this would save him about £20,000 of income tax each year. I guess the exact figure might be a bit less than this because of the way dividends are taxed for 40% tax payers.

He said he had run it by his accountant who was perfectly happy with it. I’m curious if it really is as simple as that. I couldn’t see anything actually illegal about it but it does seem a bit of a fiddle.

I guess there is at least a theoretical inheritance tax issue – i.e. his parents are effectively giving him money each year which could be caught as part of their estate if they died within the next 7 years. Anything else?

Cheers.

Eric Mc

121,779 posts

264 months

Tuesday 14th October 2014
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Zigster said:
In the pub a few nights ago, a friend (yes really – definitely not me as I’m PAYE) explained that he has given his ex wife and his parents shares in his business. He pays his ex wife dividends from the business in lieu of maintenance and he notionally pays his parents dividends – i.e. they get a tax slip in respect of the dividends as if it is their income but the money is paid direct into his bank account.

Doing this uses up his personal allowance and 20% tax band plus uses up any slack in his ex and his parents’ 20% tax bands. They all have income but none of them are 40% tax payers. So, based on a low six-figures income each year (I don’t know the exact amount) this would save him about £20,000 of income tax each year. I guess the exact figure might be a bit less than this because of the way dividends are taxed for 40% tax payers.

He said he had run it by his accountant who was perfectly happy with it. I’m curious if it really is as simple as that. I couldn’t see anything actually illegal about it but it does seem a bit of a fiddle.

I guess there is at least a theoretical inheritance tax issue – i.e. his parents are effectively giving him money each year which could be caught as part of their estate if they died within the next 7 years. Anything else?

Cheers.
It is TOTALLY illegal.

If he is declaring that he is paying dividends to his parents and they are not actually ever seeing the money, then he is perpetrating two frauds - he is defrauding his parents and defrauding HMRC.

Do his parents even KNOW he is doing this?

Shaoxter

4,048 posts

123 months

Tuesday 14th October 2014
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Pretty sure HMRC have access to bank account information so it's really not advisable to do that.

He should be paying into his parents' bank account and then maybe them funneling it back to him somehow.

Sarnie

8,025 posts

208 months

Tuesday 14th October 2014
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"the money is paid direct into his bank account"

laugh

Zigster

Original Poster:

1,636 posts

143 months

Tuesday 14th October 2014
quotequote all
Thanks.

I confess it seems a fiddle to me but I can't see the actual problem, other than the payment of the dividends to his bank account rather than his parents. How is that so different from them receiving the dividends and then paying it straight to him? Would it make it legal for them to do that, which would seem like a small technical difference?

His parents do know about it. The father had a business himself before he retired and did the usual thing of having his wife as a shareholder and receiving dividends to use up her tax allowances. So they see it as perfectly normal thing to do (notwithstanding that transfers between spouses are treated differently than between children and parents). Plus, my friend claims that his accountant says it is fine.

Super Slo Mo

5,368 posts

197 months

Tuesday 14th October 2014
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He could feasibly pay his parents and have them hand a proportion back to him, but there's an annual limit before he will get hit with tax (inheritance?). You can't just give money to people as a gift without it incurring tax, although as said, there's a threshold below which tax isn't payable.

Having had a quick look on the HMRC website, it seems his parent could each pay him £3,000 per year. Anything above this is subject to inheritance tax, although if they live for 7 years beyond the point where they gave the money, it could potentially be tax exempt.

A proper accountant (i.e. Eric Mc et al) will no doubt clarify in more detail.

Oakey

27,523 posts

215 months

Tuesday 14th October 2014
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Lots of accountants say lots of things are fine, see Chris Moyles, Used Car Salesman for example.

Zigster

Original Poster:

1,636 posts

143 months

Tuesday 14th October 2014
quotequote all
I know there is the £3,000 limit beyond which anything falls within inheritance tax, taking into account the potentially exempt transfer 7-year thing.

I thought there was also some rule around unlimited amounts as long as they were made from income and didn't materially affect lifestyle of the giver (or something like that)?

Basically, I want to push my friend on this. I don't think what he is doing is right (I mean from a legal perspective as much as a moral one) and I don't think he realises just how serious it could be if HMRC picked up on it. And I certainly don't want his parents (who are a nice old couple) to have to deal with the grief they might well get too.

dirty boy

14,688 posts

208 months

Tuesday 14th October 2014
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Best way to legally get rid of money is via a monthly gift from net income. A friend of mine receives £1k a month from his old man every month, doesn't form part of the £3k 'gift'. You can also "maintain your olds" if necessary, but having the money go into his account is a big no.

You can make exempt maintenance payments to an ex-partner too, but in the OPs case if the dividends were transferred to his ex when she was his spouse, there's no issue, so long as she's declaring the income (if required)




Eric Mc

121,779 posts

264 months

Tuesday 14th October 2014
quotequote all
He is NOT paying the money to his parents. He is PRETENDING to pay the money to his parents.

If HMRC reviewed his records and asked to see the transfer of money from the company bank account to his parents' bank account he would not be able to show that this transaction actually happened.
What they would see is the payment he claims to be to his parents actually going directly to him.

Therefore, HMRC would (correctly) state that the payment in its entirety went to him personally and he would need to return this correctly on his self assessment tax return.

His accountant has obviously not read up on HMRC's "Anti Settlements Legislation".

MrJuice

3,300 posts

155 months

Tuesday 14th October 2014
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What if, for example, his parents didn't have a bank accoun . And bee very kindly took the dividend on behalf of his parents into his account and then forwarded the dividend amount to parents in cash. Would/could that wash with hmrc?

Eric Mc

121,779 posts

264 months

Tuesday 14th October 2014
quotequote all
If he could prove that the cash was delivered to the parents, then they might be reassured. But the onus is on the company to show that the true recipient of the dividend is who the company claims it to be. If they can't prove it, HMRC have the right to treat it as NOT being to the named recipient but the ACTUAL recipient.

Of course, the likelihood of the parents having no bank account is pretty slim in the modern age.

sumo69

2,164 posts

219 months

Tuesday 14th October 2014
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I don't believe this is anything to do with "anti-settlements" - its much more serious as I believe the lawyers call it "false accounting" which is both a criminal offence and notifiable by the Accountant.

The stupid thing is that he could end up with the funds legally, and so long as his parents could demonstrate that the gift of the dividend was out of surplus income, there would be no tax liability on anybody.

A decent accountant and some paperwork is all that was needed.

David

Eric Mc

121,779 posts

264 months

Tuesday 14th October 2014
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The first thing I mentioned was that this was fraudulent on a number of counts.

The accountant is either very rash or very dumb.

Zigster

Original Poster:

1,636 posts

143 months

Wednesday 15th October 2014
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I wouldn't be surprised to find out that my friend had heard what he wanted to hear from his accountant. For example, perhaps his accountant said that he could pay dividends to his parents first and his parents could then pay it to him out of surplus income, and my friend then took it a step further and missed the step of paying it to his parents first without understanding the implications.

The firm of accountants is a decent small firm - I can imagine they would be happy providing quite aggressive advice to small businesses but I can't see them advising on something outright illegal.

I'll follow up with him to find out the details of this and see if I can persuade him to review what he is doing to make it legal.

sumo69

2,164 posts

219 months

Wednesday 15th October 2014
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I think his ears will close when you tell him that all the dividends paid to date will need to be shown on both current and where necessary amended earlier year tax returns.

I would love to know what his accountant is going to suggest to rectify the position...

David


iphonedyou

9,234 posts

156 months

Wednesday 15th October 2014
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Zigster said:
I know there is the £3,000 limit beyond which anything falls within inheritance tax, taking into account the potentially exempt transfer 7-year thing.

I thought there was also some rule around unlimited amounts as long as they were made from income and didn't materially affect lifestyle of the giver (or something like that)?

Basically, I want to push my friend on this. I don't think what he is doing is right (I mean from a legal perspective as much as a moral one) and I don't think he realises just how serious it could be if HMRC picked up on it. And I certainly don't want his parents (who are a nice old couple) to have to deal with the grief they might well get too.
Then mention your concern to him, once, and leave it.

blindswelledrat

25,257 posts

231 months

Wednesday 15th October 2014
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Eric Mc said:
The first thing I mentioned was that this was fraudulent on a number of counts.

The accountant is either very rash or very dumb.
Although to clarify: I believe it is perfectly legal to have whoever you want as shareholders and pay them dividends accordingly isn't it?
THe only element in the OP is that it is so obviously a vehicle for tax avoidance and he is stupid enough to not even make an effort to disguise this.

oyster

12,577 posts

247 months

Wednesday 15th October 2014
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blindswelledrat said:
Eric Mc said:
The first thing I mentioned was that this was fraudulent on a number of counts.

The accountant is either very rash or very dumb.
Although to clarify: I believe it is perfectly legal to have whoever you want as shareholders and pay them dividends accordingly isn't it?
THe only element in the OP is that it is so obviously a vehicle for tax avoidance and he is stupid enough to not even make an effort to disguise this.
Is it?
What about the case of the sole trader paying dividends to his wife to take advantage of her tax allowances?

blindswelledrat

25,257 posts

231 months

Wednesday 15th October 2014
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No idea. I didn't even think sole traders could pay dividends. I thought they were paid out on shares of limited companies?