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We are obviously delighted and relieved that the House of Lords has unanimously held in favour of the taxpayer in the “Arctic” case.

Essentially, their Lordships held that;

There was an “arrangement” between Mr and Mrs Jones such that the settlement legislation did need to be considered (with only Baroness Hale questioning whether this was the correct analysis); and Ordinary shares in a company are not “substantially a right to income” with the result that an outright gift of them from one spouse to another (such as featured in this case) was exempted from the definition of “settlement”.

So where does that leave husband and wife tax planning more generally? Well, it seems that sharing income with a spouse by the expedient of transferring ordinary shares in a family company works – even if the company has nothing in the way of capital assets, retains no profits and acts merely as a conduit through which the profits of the company flow through to the shareholders as dividend. Although Mrs Jones did carry out some work for the company and had only a 50% interest in the company, this was not crucial to the decision: the decision would, we think, have been the same if Mrs Jones had been an entirely passive investor holding a majority of the share capital. And, of course, an outright transfer between spouses of an income-producing asset (such as an investment property) continues to be effective for tax purposes (provided that what is transferred is more than merely a right to income).

What of preference shares? The arguments that apply to ordinary shares do not apply to preference shares: these may well be “substantially a right to income” and dividends payable on such shares when issued to a “passenger spouse” may well be caught. So continue to avoid them.

Unmarried couples? The HMRC challenge in the case of “passenger non-spouses” (i.e., unmarried couples otherwise in the same position as Mr and Mrs Jones) has been that the structure is caught because it amounts to a revocable settlement. The Arctic decision held that the “arrangement” in Arctic is limited to the transfer of the shares together with the expectation of future dividends; this would seem to leave high and dry HMRC’s argument for a wider meaning of “arrangement” in non-spouse cases. But the point is not, perhaps, completely clear: some further thought needs to be given to such cases. Or get married.

Husband and wife partnerships? In Arctic, HMRC were defeated on the specific grounds that the particular form of the tax-planning arrangement (the inter-spouse transfer of ordinary shares) was not a “settlement” under the terms of the Act. The case has nothing to say about husband and wife partnerships (or LLPs) where one spouse gets a share of profit but does none of the work. There are other arguments that may be adduced to resist an HMRC challenge to such arrangements, but Arctic is not one of them. Whether having lost Arctic HMRC will want as a matter of policy to challenge substantially similar planning for an unincorporated business (even if they could) is something on which we will have to wait and see.

But, in the famous words of St Margaret of Grantham – “Just rejoice at that news”.