The House of Lords has ruled in favour of Geoff and Diana Jones of Arctic Systems in a judgement that has removed a tax threat from thousands of family businesses throughout the UK.

HMRC's attack on companies that are jointly owned by one revenue-earning spouse and one non-earning spouse has been rejected. Geoff and Diana Jones, supported by the  Professional Contractors’ Group, have succeeded in their three-year struggle to stop the Revenue reinterpreting tax law retrospectively.

All five Law Lords rejected HMRC's appeal on the basis that it fell within the exemption provided for an outright gift between spouses. The settlements legislation therefore does not apply to companies jointly owned by married couples and civil partners and structured in this way.

Although Diana Jones bought her share in Arctic Systems, rather than being directly given it by Geoff, the judgement treats this purchase as a gift, on the grounds that it was only possible because Geoff allowed Diana to buy the share. Gifted and purchased shares are therefore both within the scope of the exemption for gifts between spouses.

All five Lords therefore disagreed with the Court of Appeal, which had ruled that no settlement had taken place. Lord Hoffman observes: "I cannot agree that this was a ‘normal commercial transaction between two adults.’ It made sense only on the basis that the two adults were married to each other. If Mrs Jones had been a stranger offering her services as a book keeper, it would have been a most abnormal transaction. It was only ‘natural love and affection’ which provided the consideration for the benefit he intended to confer upon his wife. That is sufficient to provide the necessary ‘element of bounty’."

Having established that a settlement had occurred, however, they also established that it was exempted from the settlements legislation.