Income Shifting

[IR35FanClub]

We're planning to get mrried anyway (not tax related)

Before you do that ask yourself "what are the benefits to marriage and what are the pitfalls". As I'd shelled out over £1500 in legal fees (just for 1 day) to have both a barrister and solicitor in court at my divorce case I asked them both (female) for advice on this. They agree there was nolonger any upside to marriage, but it becomes an expensive mess if you want to reverse it. In fact the barrister said she doesnt understand why people still get married, have a ceremony and party and all that, but skip the legal bit. Theres a nearly 50% chance youll be getting divorced... remember that! Their advice was also that prenups still dont have a legal precedent in the UK especially for normal incomes, but its still worth doing one incase there did become a legal precedent. I asked becuase my GF at the time had a big difference in income and assets to myself, and the thought of losing another 50% was a head ache. anyway i digress...

Im helping my current partner set up a business, but arent taking any interest or income, well not unitl it makes money, wink wink. I am taking an active role doing accounts, purchase ordering, IT and marketing, basically anything that isnt the actual money making service. Personally I think for contracting income shifting is a but dodgy as theres not really a lot of admin to do. I spend about 2-3 hours a month on my expenses, invoicing paying myself' looking at my was and hectors share. If you factor youre doing say 120+ hours a month on expensive billable work its hard to justify and admin person getting anything like 5% even.

I always asked myself this question.. how much would I be willing to pay some bloke across the road to save me having to do it... and that probably makes it not worth doing. You would NOT pay £7k a year for someone to send an invoice and do your PAYE.

[Wanderer]

I always asked myself this question.. how much would I be willing to pay some bloke across the road to save me having to do it... and that probably makes it not worth doing. You would NOT pay £7k a year for someone to send an invoice and do your
PAYE.

The opinion here seems to be that the spouse should do "some work" for the company but it's clear that many people pay a much higher salary to their spouse than they would to a non-connected person.

So technically, paying a non market salary to a connected person would constitute a settlement and this would be taxable on the settlor. But perhaps it's possible to argue that the exemption for a spouse or civil partner under S626 applies to salary as well as dividends so the work done is irrelevant.

Indeed, the Arctic systems case noted that Mrs Jones was paid a salary. The impression I got was that the challenge was against the settlement involving both the salary and the dividends and this challenge was defeated on appeal.

Paying a spouse a £7488 salary is going to keep their NI stamp up to date and save at least £1500 in tax, more if you are a higher rate tax payer. I think that helps a lot of people to decide what to do....

[JoJoGabor]

I was looking at dividing shares in the company so my wife would get dividends only, no salary. That's less contentious right?

[eek]

I was looking at dividing shares in the company so my wife would get dividends only, no salary. That's less contentious right?

The Arctic Systems case confirms that income sharing via dividends between a man and wife is fine.

[formant]

Before you do that ask yourself "what are the benefits to marriage and what are the pitfalls". As I'd shelled out over £1500 in legal fees (just for 1 day) to have both a barrister and solicitor in court at my divorce case I asked them both (female) for advice on this. They agree there was nolonger any upside to marriage, but it becomes an expensive mess if you want to reverse it. In fact the barrister said she doesnt understand why people still get married, have a ceremony and party and all that, but skip the legal bit. Theres a nearly 50% chance youll be getting divorced... remember that! Their advice was also that prenups still dont have a legal precedent in the UK especially for normal incomes, but its still worth doing one incase there did become a legal precedent. I asked becuase my GF at the time had a big difference in income and assets to myself, and the thought of losing another 50% was a head ache. anyway i digress...

Nobody forces you to use a solicitor/barrister - and that's the only thing that'll truly cost you. If you don't have kids and can agree a financial settlement outside of court, you can easily get divorced for under £400). The divorce itself is the cheapest part of it - it's disputes about kids and finances that draw things out and could get pricey if you allow them to.

My partner's divorce cost us only the application cost for ancillary relief (£240) and and child residence (£280). We'd have covered the divorce petition as well (approx. £300), but the ex refused to hand over the marriage certificate and they had gotten married abroad, so ordering a replacement just to file for divorce wasn't an option. So she eventually applied.

His ex's fees have totaled well over £15k so far, because she decided to let solicitors and barristers do all the work. And it's not like they did a great job either (they for example submitted a lot of her stuff late, rendering whole statements inadmissable).

The divorce and ancillary relief are now finalised, child residence is currently back in court (and probably will go back to court every couple of years). We've so far "won" about as much as anyone could win in these circumstances. Googling and reading up on family law, paired with decent writing skills will get you further than most solicitors.

I agree that there's little point in getting married (and yet my wedding's still booked for August), but that's not about the cost of divorce. Even when you're not married - the moment you buy a house together and have kids, you're just as tied up as a married couple and splitting up is likely to get just as difficult. The <£400 for the divorce petition and decree absolute are the only cost you're going to incur solely on the grounds of being married.

[northernladuk]

To collect dividends your wife doesn't need to do anything. To receive a salary she probably should do appropriate work for the amount paid but I did see any accountant argue that she didn't need to do anything on here recently

This doesn't make sense? Could you reword?

[psychocandy]

Did you check the comments at the bottom, i.e.



Do you meet that criteria for a start? The bottom comment kinda answers the question if you have to be married. The fact they are making that comment would lead me to think that it isn't as black and white as your matrial situation. It appears there are other aspects you need to be wary of that could make a married couple fail but a cohabitee acceptable. I think the last comment is the most interesting 'establish a joint business'. I personally think anyone who has given shares to their wife purely to use her tax breaks is on borrowed time....

No mate. Arctic covers all this. Admitedly, slightly different personal circumstances as the OP may not be quite as straightforward.

I think you will find a lot of accountants will say there is no problem as long as you are married.

[psychocandy]

I was looking at dividing shares in the company so my wife would get dividends only, no salary. That's less contentious right?

still got to be sure you're personal situation is covered by the Arctic case precedent.

[northernladuk]

No mate. Arctic covers all this. Admitedly, slightly different personal circumstances as the OP may not be quite as straightforward.

I think you will find a lot of accountants will say there is no problem as long as you are married.

Indeed but both the Arctic case and the regulation use the term 'family business' and as I posted earlier the test says 'should where possible contribute'. If this is the case then yes, totally fine. As I said, giving them to your wife for no other reason than to use tax breaks is not a business reason, no chance of contribution and she is not involved in the business so fails the test... so on borrowed time.

You can't take the blanket view just because one court case wins that that it is ok without actually understanding the details of the situation. It will win if she meets the criteria, it won't if she doesn't. As always with tax stuff the devil is in the details, it is not a blanket free for all.

[Wanderer]

Indeed but both the Arctic case and the regulation use the term 'family business' and as I posted earlier the test says 'should where possible contribute'. If this is the case then yes, totally fine. As I said, giving them to your wife for no other reason than to use tax breaks is not a business reason, no chance of contribution and she is not involved in the business so fails the test... so on borrowed time.

Nope. Quite the contrary.

The Lords found that although Mr and Mrs Jones claimed to have a "joint business venture to which both parties made substantial and valuable contributions", the "analysis is divorced from reality" and the only reason for issuing the shares was to avoid tax. The whole arrangement was completely artificial and under the law, this would give rise to a settlement and would be taxable on the settor (Mr Jones in this case).

However, because this was an ordinary share it was was "not wholly or even substantially a right to income" as it also confers a "right to vote, to participate in the distribution of assets on a winding up, to block a special resolution, to complain under section 459 of the Companies Act 1985" and these are valuable rights. Therefore, "this arrangement falls within the exception in section 660A(6)" (now s626) which allows an exemption provided that it is "not wholly or substantially a right to income".

So the intention of the gift was to split the income and avoid tax, the spouse had no significant input to the company but the Lords found that because of the rights attached to an ordinary share (as opposed to a preference share), this fell within the exemption.

Now HMRC, the government and probably a lot of other people don't see it this way at all, seeing it as a straight forward tax dodge. However, their opinion doesn't matter, it's what the Lords found that counts.

So to make this work you need to unconditionally gift an ordinary (not preference) share to your spouse.

All of those quotes come from the primary source which is Jones v Garnett judgement or the legislation I linked to. Have a read of it and search for them for the quotes to understand the full context.