Limited Company - Income Splitting yes or no?

[helen7]

They say this could be announced in the next budget and be implemented retrospectively so they recommend against it. If it was, could they charge penalties? As far as I can see it's perfectly legal tax avoidance under current law.
l

ha ha ha....surely the Goverment couldn't invent a time machine and start changing tax law retrospectivley.

um...suggest you all go and read the BN66 thread; your income shift days may be over; or may have never existing today, tomorrow or yesterday.

[THEPUMA]

I am one of those heathens living out of wedlock.

2 kids for her to look after at home now and we're trying to calculate the going back to work or housemum/doing my invoices and paperwork while they're at nursery idea.

What difference does the not being married thing make with regards to the sale of 50% of shares and/or the payment of dividends?

J.

There are a couple of implications.

Firstly, the easy one. When you transfer the shares, you need to do a holdover relief claim in order to avoid a CGT liability on the transfer. I think it unlikely that HMRC would seek to argue that the shares were employment-related securities and impose a resultant PAYE/NI liability.

Secondly, more complicated. Does the s660(a) (as was under the old section numbers) exemption apply? No. However, the exemption does not necessarily need to apply because the settlements legislation may not apply in the first instance.

The settlements legislation applies where (amongst other things), someone gives something away but retains an interest in it. If you give something to your spouse or minor child, this automatically bites.

If you give it away to someone else, it is not automatically the case. So if you gift shares to your unmarried partner, pay dividends which are not gifted back to you, then the settlements legislation does not apply. I don't believe this would prevent your partner from paying their share of household running expenses, holidays, cars etc so in many circumstances this should work out fine.

PUMA

[biggles_1]

The response from my accountant. Another of the big ones was:

"As you are not married we would advise against having your wife as a shareholder within the business as this would be classed as income shifting, please see attached factsheet.

With regards your partner receiving a salary through the business HMRC would have to see that the amount of salary being paid is justified by the level of work that she is undertaking e.g. at a high rate of £10 per hour for processing invoices etc may take a maximum of 3 hours per month which would only equate to an annual salary of £360."

It sounds like it's probably not worth the risk.

J.

[northernladuk]

The response from my accountant. Another of the big ones was:

"As you are not married we would advise against having your wife as a shareholder within the business as this would be classed as income shifting, please see attached factsheet.

With regards your partner receiving a salary through the business HMRC would have to see that the amount of salary being paid is justified by the level of work that she is undertaking e.g. at a high rate of £10 per hour for processing invoices etc may take a maximum of 3 hours per month which would only equate to an annual salary of £360."

It sounds like it's probably not worth the risk.

J.

They said that word for word?? Not married so advise against puting your wife as shareholder. LOL I would have thought you physically couldn't as you don't have one. Good advice that

[THEPUMA]

The response from my accountant. Another of the big ones was:

"As you are not married we would advise against having your wife as a shareholder within the business as this would be classed as income shifting, please see attached factsheet.

With regards your partner receiving a salary through the business HMRC would have to see that the amount of salary being paid is justified by the level of work that she is undertaking e.g. at a high rate of £10 per hour for processing invoices etc may take a maximum of 3 hours per month which would only equate to an annual salary of £360."

It sounds like it's probably not worth the risk.

J.

Just to clarify, you would have to commercially justify your partner's salary (although in practise I've never known of a case where it has been challenged) but you don't have to commercially justify a dividend.

I would seriously reconsider not giving your partner a salary or dividend. The tax cost will be virtually £11K pa if you otherwise draw this out as a dividend to yourself which is taxed at 25%.

PUMA

[Wanderer]

Here's an Expert’s Answer to the question.

The question you pose is really about whether 'income-splitting' creates a settlement of income from one person to another. This is important as under UK tax law (previously S660A ICTA 1988, now Chapter 5, Part 5 of ITTOIA 2005) the income would be taxed as still belonging to you (i.e. the settlor).

In order to achieve 'income splitting,' shares would be gifted from you to your wife, and it is this action which can create a settlement. The Arctic Systems judgement stated that in the context of the facts of that case, although the gift of ordinary shares was bountiful, it was an outright gift and not a gift solely of income. A gift is not an outright gift where it is subject to conditions or in circumstances where the ‘giver’ will receive a benefit from the property or income or proceeds from that property.

In short, the answer to your question is that it is possible to pass shares to your wife that give her the right to receive dividends provided that they also give a right to receive capital and that you do not attach conditions to the gift or derive benefits from the shares you have given away. Your accountant has suggested that you do not go ahead with such a gift, but you have not said on what basis he issued this advice. It may be that what you propose does not meet the tests mentioned above.

With regard to the change in legislation on 6 December 2007, the government announced consultation on new legislation which would rule out this practice (the so-called ‘income-splitting’ regime). This draft legislation was 'postponed indefinitely' in the 2008 pre-Budget report. At present the Arctic Systems ruling remains valid.

The expert was Paul Spindler, a technology partner at Kingston Smith LLP , the chartered accountants. For further advice on the above guidance, contact [email protected]

[malvolio]

Couple of points...

It's not "Income Splitting", it's "Family Business Tax".

Income splitting is artificially passing dividend to relatives while retaining access to it yourself, which remains illegal. The whole point of Arctic, in practice, was that man and wife share the risk of a business so are fully entitled to share the returns from the business. The application of S660a t oArctic (And others, let us not forget, who have paid up) was HMRC retrospectively applying the law in the wrong way.

People you are not legally bound to are not affected in the slightest, even if you've been living with them for 40 years.

The Arctic judgement will stand and cannot be appealed. It will take a whole new law to do what Hector wanted to do. That law proved almost impossible to frame, plus very strong representation from PCG and the accountancy profession demonstrated it would be impossible to apply consistently. Thats why it hasn't come back to the surface

NL does not have a good record of honesty (it hasn't got one at all, in fact). They can't admit the whole idea is flawed, so they just stop talking about it.

[The Wikir Man]

It's not "Income Splitting", it's "Family Business Tax".

Proposed Family Business Tax

[Bod]

Married versus Cohabiting

My accountant (used by many here) is uncomfortable with me making an outright gift of ordinary shares to the company secretary, my unmarried cohabiting partner of 15 years. I see this as more than a little odd. Why should I not gift shares to anyone I choose. I could pass 10 shares to a passing vagrant if I chose to....

Now, the co. sec. and I have considered a weekend in Gretna just to quash the issue, but really don't see why we should. Any court in the land would agree that we have demonstrably been living as man and wife for a decade and a half.

I'd be interested to hear from other unmarried couples (bring your car keys ) who have made efficient use of current tax law - including details of the advice they received.

My accountant hasn't stated their verbal position in writing - and I'll be giving them the opportunity to do so. However, if the same concerns are given in writing, I don't see that I have any choice other than switching to a less risk averse supplier.

Would also be very interested to hear any tax implications (someone mentioned CGT?) of gifting shares to unmarried partners.

Finally, would joining PCG offer me (us) additional protection from Hector?

[Waldorf]

My accountant (used by many here) is uncomfortable with me making an outright gift of ordinary shares to the company secretary, my unmarried cohabiting partner of 15 years. I see this as more than a little odd. Why should I not gift shares to anyone I choose. I could pass 10 shares to a passing vagrant if I chose to....

Now, the co. sec. and I have considered a weekend in Gretna just to quash the issue, but really don't see why we should. Any court in the land would agree that we have demonstrably been living as man and wife for a decade and a half.

I'd be interested to hear from other unmarried couples (bring your car keys ) who have made efficient use of current tax law - including details of the advice they received.

My accountant hasn't stated their verbal position in writing - and I'll be giving them the opportunity to do so. However, if the same concerns are given in writing, I don't see that I have any choice other than switching to a less risk averse supplier.

Would also be very interested to hear any tax implications (someone mentioned CGT?) of gifting shares to unmarried partners.

Finally, would joining PCG offer me (us) additional protection from Hector?

I think CGT applies to transfers between unmarried partners, so you could end up with a tax bill, ask your accountant to set out why they advise against it.

At the end of the day its your company and you can do what you want, you can ignore the accountants advise, I can't see that they would refuse to do what you ask.