HMRC’s latest avoidance spotlight draws attention to a dividend diversion scheme used to fund the cost of education fees.

The spotlight explains that the arrangements are aimed at individuals who are the directors and main shareholders of a company and that they work broadly as follows:

  • Company issues a new class of shares which usually entitles the owner of the shares to certain dividend and voting rights;
  • Person A, usually a grandparent or sibling of the company owner, purchases the new shares for an amount significantly below market value and gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children;
  • Person A or the company owners vote for substantial dividend payments in respect of the new class of shares and this is paid to the trustees of the Trust;
  • As the beneficiaries of the Trust, the company owner’s children are entitled to the dividend.

The company owner’s children pay tax on the dividend received. However, they pay less tax than if the company owners received the dividend because of their children’s tax-free personal allowance, dividend allowances and eligibility to the dividend basic tax rate.

HMRC’s view is that this scheme does not work because the arrangements are caught by specific anti-avoidance legislation contained in ITTOIA 2005, s 619 onwards that prevents this type of arrangement from providing the tax advantage that is sought.

HMRC ‘strongly advises’ anyone using this or similar schemes or arrangements to withdraw from it and settle their tax affairs.