[Tax Planning][17/18] Company structure - spouse

[Antman]

Mine cleans the study, but she charges £40 per hour because she does it in the buff

[LondonManc]

It appears alphabet shares are being more and more recommended when the general consensus was to avoid them. Using them just to give 5k tax free divis seems pretty aggressive tax avoidance on the face of it.

Is alphabet shares now the standard advice whatever the wife's situation and if so how long before HMRC come down on us like a ton of bricks to counter it?

For me, having the wife involved in your limited company at all comes down to whether she reasonably has time to discharge duties. Mine cleans the study, does the books, sorts out travel expense, etc. and has no other job. I've kept her off the JSA - she would have gone out and got a job elsewhere if I was perm and had no means to gainfully employ her.

[Fred Bloggs]

I think WiB has pretty much nailed it there, I would do that too.

Happy 10^3 post too, WiB!

[WordIsBond]

The standard advice for some time has been that alphabet shares can be risky (as per TCP's post above) as being aggressive tax avoidance. Since they now have the right to pursue you for tax avoidance (within the law as written) that they interpret as violating the intent of the law, I would say the risk of alphabet shares is higher than it used to be. The advice historically has been that there should be a legitimate business reason for alphabet shares. The reason given in this thread is not a business reason but a personal tax planning one. I'd hesitate to do it if I were the OP, for those reasons.

I'll also add that it is my understanding that HMRC has full access to details of the shareholdings of limited companies. It seems likely that they would at some point start looking at companies with one A share and one B share, owned by spouses. I'd just avoid it, personally.

(Disclaimer: MyCo has alphabet shares, but MyCo is not the standard one man band, and the business reason is to provide a form of profit sharing to employees without risking control of the company.)

If I were the OP, I would not pay a salary to spouse, since that would put her into higher rate tax. I would want to structure shares such that my spouse could receive £5K dividends tax free, and that I could approximately maximise my income under the higher rate band.

I would pay myself £8K salary. That would leave £37K available for dividends (presumably that £37K will increase towards £40K or higher in the next few years) without going into the higher rate band. So the target dividends would be £5K for spouse and £37K for myself. I would use an 8-1 split, 8 shares for myself, 1 share for spouse.

This year, I would pay £4.6K per share in dividends -- £36.8K to me, £4.6K to spouse. As the threshold increases in future years, I would increase the per share dividend, keeping myself within the basic rate band. Once the per share dividend reached £5K, if I still had room within the higher rate band, I would increase the salary instead (which would incur NI liabilities but save on Corporation Tax, so almost a wash).

If your spouse ever quits her job, you could restructure, everything changes. You probably don't want to change your share structure frequently (that also could look suspicious to HMRC), but it certainly makes sense to review it every 4-5 years.

Edit: Just noticed this is my 1000th post. Incredible. I need to get a life.

[teapot418]

It appears alphabet shares are being more and more recommended when the general consensus was to avoid them. Using them just to give 5k tax free divis seems pretty aggressive tax avoidance on the face of it.

Is alphabet shares now the standard advice whatever the wife's situation and if so how long before HMRC come down on us like a ton of bricks to counter it?

I've only seen the advice from InTouch - it would be interesting to hear other accountants' views.

[TheCyclingProgrammer]

It appears alphabet shares are being more and more recommended when the general consensus was to avoid them. Using them just to give 5k tax free divis seems pretty aggressive tax avoidance on the face of it.

Is alphabet shares now the standard advice whatever the wife's situation and if so how long before HMRC come down on us like a ton of bricks to counter it?

On the face of it there's nothing about alphabet shares - assuming they are ordinary shares and carry all the same rights - that contradicts what was established in Arctic. They are more than a right to income and therefore the spouse exemption should still apply. That said...

Would be interesting to see if HMRC pursued a similar argument to the one they did with waivers though. In this case they argued that whilst the underlying gift of shares was not caught due to the spouse exemption, the waivers themselves constituted a separate arrangement in itself and one that was solely a gift of income so therefore a settlement and one that was not covered by the exemption.

It's not a huge leap of logic for them to argue that declaring dividends on a particular class of shares to take advantage of a spouse's tax allowances could constitute a settlement of income in its own right.

Of course this brings us back to the thing I always raise when settlements are brought up on here - do HMRC have the time, manpower and will to dig out the settlements legislation again and potentially start another Arctic? Maybe not, although if the use of alphabet shares to take advantage of the dividend allowance becomes more and more prevalent (as you say this advice seems to be becoming more common) then who knows...

[northernladuk]

It appears alphabet shares are being more and more recommended when the general consensus was to avoid them. Using them just to give 5k tax free divis seems pretty aggressive tax avoidance on the face of it.

Is alphabet shares now the standard advice whatever the wife's situation and if so how long before HMRC come down on us like a ton of bricks to counter it?

[SueEllen]

You don't have to but it's definitely beneficial for your spouse to be a company officer if she's also a shareholder so she can be eligible for ER in the future.

Mine is currently CS though I'm planning to make her a director. I'm not sure there's any real reason to choose one over the other.

CS have less legal liability as they follow the director's(') instructions.

They can still be taken to court for injuries during a match, but from what I've read their liability is more about not raising alarms to the right people.

[Neil@Intouch]

Hello,

I am planning to incorporate a LTD next month and I need an advice on the company structure:

That's the plan:

Director[50% shares]:

• Profile: Senior Automation QA
• Desired daily rate: ~ £350-£500
• Target anual income: ~ £90,000 - £100,000
• Director salary: £8,150

Secretary[50% shares]:

• Anual income:
  * ~ £32,000 permanent employment outside the LTD
  * £8,150 secretary salary

1. Does this company structure make sense considering that my wife is a permie and gets salary just below the basic rate? Will there be tax advantage if I include her as an employee?
   
2. Shall I reduce her shares to 35%?

Thanks all

I would advice an alphabet share structure, which would be suitable in this circumstance to allow flexibility on the dividends you take out of the business, and not have the restriction of 50/50 dividends.

Paying your wife a salary would mean that it would all be taxed at 20% (income tax), but yes you will get the corporation tax relief on the salary of 20% also, but the tax efficient way will be with an alphabet share structure. 1 ordinary A for yourself and 1 ordinary B for your wife. Any dividends from £32k to £43k this year or £45k for 2017/18 will be taxed at 7.5%. Any dividends into the higher rate tax threshold will be taxed at 32.5%.

Bear in mind though that if this is all in place for the 2016/17 tax year, £5,000 of dividends can be taken tax free regardless of employment income, so would recommend utilising this if possible.

I hope this helps.

[TheCyclingProgrammer]

Am I right in thinking you don't have to appoint a company secretary any more? Or, is this secretary role quite literally that, and not an official role?

You don't have to but it's definitely beneficial for your spouse to be a company officer if she's also a shareholder so she can be eligible for ER in the future.

Mine is currently CS though I'm planning to make her a director. I'm not sure there's any real reason to choose one over the other.