Dividend payments from shares

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  • #45379
    Ripley
    Participant

    I am wondering if someone can help me with this.

    I have a claim where the customer has been given C class shares in her parents business.  She is not a director of the company.  The shares cannot be sold as they have no sale value.  They were a gift and can only be transferred back to the holders of A class shares.  Her parents are the only A class share holders.

    However, the shares provide a regular tax credit share dividend of £500.00 per month.

    Would this be included as unearned miscellaneous income?

    #127678
    pbirks
    Participant

    I thought these would be treated as any other sort of share

    Shares in a company are treated as capital – and any dividend from those shares is also treated as capital.
    of course, if she chooses to spend her £500 a month capital on stuff, then her capital may not increase.

    #127689
    Ripley
    Participant

    I was hoping that as the shares had no value I could treat the payment she receives in a different way.
    Thanks for your help and I will include it as capital.

    #127701
    Andy Thurman
    Keymaster

    While the above analysis is correct, I wonder whether a different interpretation could be argued on the specifics of the case. If the shares have no value at all, do they really class as capital?? If not, then the £500 per month could be viewed as an income.

    This is, in some ways, analagous to “sole-trading” company directors who pay dividends to themselves on a regular basis to supplement their low wages.

    Interested to hear others thoughts….

    #127791
    peterdelamothe
    Keymaster

    It is certainly arguable that the income should be treated as income for HB purposes.

    Remember that dividends can ONLY be paid out of taxed profits. No profits ….no dividend is possible under any circumstances.

    #127801
    pbirks
    Participant

    Although they cannot be sold, this may not be because they have no value. They were gifted with a clause that they could only be transferred back to the holders of class A shares, so presumable even if they did have a value, she cant sell them.(Im not sure what the differences between class a and class c shares are though)
    The company must be making a profit to have dividends – but maybe the class a owners want to ensure who has ownership of the company (hence the clause that she cant do anything with them apart from give the shares back.)

    If its going to count as income, wouldnt it be charitable payment and disregarded ?(as there doesnt appear to be any duty or liability for the company/shareholders to pay her this money, the £ she gets isnt guaranteed and is the result of a gift)
    Im just offering up options – I’m happy to be put right though.

    Re the sole traders receiving dividends, can someone tell me where to find the caselaw/appeal/reg which says these dividends are income?

    #127810
    John Boxall
    Participant

    [quote=peterdelamothe]Remember that dividends can ONLY be paid out of taxed profits. No profits ….no dividend is possible under any circumstances.[/quote]

    It is perfectly possible for a company to pay a dividend on ordinary shares despite not having made a profit.

    The GWR did so throughout the 1930’s despite running at a loss

    Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and—and in short you are for ever floored.

    Wilkins Micawber, Ch12 David Copperfield

    #127813
    peterdelamothe
    Keymaster

    Dividends are always capital and the (non HB) caselaw I have looked at (and DWP advice) is clear on that. However, some benefits staff argue that if the payment is regular (say monthly) it should count as income. I dont agree with that for a number of reasons including that accounting practices differ and it is easy to get around this using loans.

    I agree that the shares themselves may have a capital value….on the face of it, this would result in the claimant losing all of her HB and CTB (an income of £6,000 would suggest a valuation of around £60,000 minimum bearing in mind current interest rates and the risks of holding A shares with no votes). But the test is what would a willing buyer pay and I dont know of a market for this type of stock.

    #127816
    peterdelamothe
    Keymaster

    John….that would have been out of retained profits from previous years.

    #127845
    Ripley
    Participant

    Thank you all very much for the advice.

    As far as I am aware, the same amount of class C shares were given to each daughter, so that the class A share holders (the parents) could provide each child with a guaranteed income of £500.00 per month. This income shows as a tax credit dividend.
    My first thought was that it should be counted as capital but I didn’t like the fact that the shares had no specific value.
    However, if I treat it as income would it have to be considered as charitable/voluntary, or could it be miscellaneous unearned income as it is coming from a company, and not directly from family?

    #127874
    peterdelamothe
    Keymaster

    Firstly, I think these shares are of value and would exclude the claimant from HB / CTB. There is the argument about no willing buyer though; but £6,000 income per year would suggest they have a considerable value.

    Putting that aside and if you do not agree, I do not see that this is voluntary income. The parents gave the shares not the income. In effect they have handed over a sum of capital in the form of a stake in their company. Dividends are normally capital from the date of receipt. There is an argument that this can be treated as regular income though and if you decided upon that, then I would treat this as unearned income.

    Not seen this type of case in 30 years in HB; the parents must have a substantial company with large profits being generated.

    #128030
    Ripley
    Participant

    Thank you for all of the comments. Your thoughts have been quite interesting. Just to update you as I have gained more information in respect of this case.

    The A Ordinary share holders (the parents) have confirmed that in the company’s ‘Articles of association’ it states that:-
    The legal and beneficial interest of C Ordinary shares are transferable only to a person who is the holder of A Ordinary shares for no consideration.
    The directors (A Ordinary share holders) may, in their absolute discretion and without giving any reason, refuse to register the transfer of any share, whether or not it is a fully paid share.
    (a copy of the document was provided)

    The parents also confirmed that they would not want or permit transferring the shares as this would remove her income from company dividends and defeat the original purpose of their gift to her.

    The shares represent 5.6% of the company, but the C Ordinary share holder does not have the right to attend of vote at general meetings of the company.

    As she cannot physically realise any money from the transfer of the shares and the shares do not have a specific value, it would be difficult to decide how much they were worth. However, having checked the company details on line, I have found out that the company’s book value is £2,114,415. But would it be fair to use this to work out her share of the company? Could I even work out a value if it has been confirmed that they would be transferred at no consideration? How would it hold up at appeal?

    I think I am leaning more towards using the dividend payment as unearned income.

    What do you think?

    #128035
    John Boxall
    Participant

    it would seem to me that there may be a market value for her right to recieve income from the shares (the easy bit)

    But if such a market in fact exists or that the shares would have much if any value is another thing altogether

    My view tends towards it being capital

    Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and—and in short you are for ever floored.

    Wilkins Micawber, Ch12 David Copperfield

    #128093
    walmslm
    Participant

    Strange world isn’t it when the non-estranged daughter of owners of a £2million business potentially gets her rent paid by public monies, at the same time as some large families are having theirs capped down to 50p a week …

    #128094
    John Boxall
    Participant

    Mine is not to reason why…………….

    Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The blossom is blighted, the leaf is withered, the god of day goes down upon the dreary scene, and—and in short you are for ever floored.

    Wilkins Micawber, Ch12 David Copperfield

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