Original rules prevented individuals from passing income to another family member in an effort to reduce their overall tax bill whilst still retaining a benefit from the income.
Known as ‘Income Shifting’, it is commonplace for (example) a husband and wife to be equal shareholders in a company where only one party actually generates the income. When distributing dividends, the income earned by one party can be partially taxed on the other party at a rate lower than may have occurred had all the income been treated as if it belonged entirely to the person generating it.
HMRC believed the above scenario to be an abuse of Section 660 and challenged it aggressively – for a while they were quite successful as there was a drop in new businesses where husbands and wives divided share ownership between themselves. Then HMRC's understanding of Section 660 was put to the test.
The most high profile Section 660 case Arctic Systems went all the way to the House of Lords who found the HMRC interpretation to be insufficient. Almost immediately, HMRC announced plans to bring in new Income Shifting rules and draft legislation was subsequently published.
Despite the intention of HMRC to introduce new legislation this has not happened to date. Husband and wife companies are still able to allocate shares to each party in any ratio they commercially decide. It is worth noting however that HMRC do regularly review such situations and they may decide to take a new case to court if they believed the Judges would find a different conclusion to the Artic Systems verdict.
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Disclaimer: The above information does not constitute professional advice, only general information.