The recent case of Patmore TC619 provides an interesting variation on the position where shareholdings and dividends are arranged so that a spouse can take advantage of his or her basic rate band. In this case, Mr & Mrs Patmore purchased the shares in a company in which Mr Patmore previously worked. Part of the consideration was paid in cash (found from a mortgage on their jointly owned property), and the balance was to be paid in instalments. Mr Patmore had 98% of the company and Mrs Patmore 2%. Some non-voting B shares were then issued to Mrs Patmore, and a substantial dividend was paid only on the B shares. The dividend was then immediately paid by Mrs Patmore to Mr Patmore to enable him to pay the deferred consideration to the vendor. HMRC took the view that this was a settlement, precisely following the reasoning in Arctic Systems, and that the dividend should be taxable on Mr Patmore.
This reasoning looks rather compelling, and the Tribunal accepted the point − but only to a limited extent.
The Tribunal’s reasoning (which was not argued by either side) was that when the shares were purchased, the consideration had really been provided equally by Mr and Mrs Patmore. However, she only received 2% of the shares. The Tribunal decided that there was therefore a constructive trust in Mrs Patmore’s favour. She contributed half of the capital to buy the shares, as she was jointly liable with her husband on the loans and the mortgage. She did not intend to give her half to her husband. Accordingly, she was entitled to her full share of the dividends paid on both the A and the B shares. Therefore the amount of dividend effectively diverted to Mrs Patmore beyond the amount to which she was really entitled was relatively small.
The Tribunal found that the issue of the B shares to Mrs Patmore involved no bounty and therefore there was no settlement for the purpose of Section 660A. Accordingly, issues about whether it was excluded as a settlement on the spouse did not arise.
This is an interesting variation on Arctic Systems, although perhaps it did not address the point that it was Mr Patmore who did all the work in the company to earn the profits and generate value. I think we may hear more about this.