Director Vs Shareholder

**Clare@InTouch** · 14 February 2014, 13:51

There is no issue with having your spouse as a shareholder. Income shifting only becomes an issue when you're giving shares to someone who is not your spouse, such as your girlfriend, parent or child.

You do not need to be a director in order to be a shareholder. If your wife does have shares then it makes sense for her to be a company secretary, employee or director though as there can be tax benefits when you close the company - specifically the availability of Entrepreneurs' Relief.

If you wife does your accounting work you can pay her a wage. This is tax efficient if she doesn't earn elsewhere, plus enables her to get credit for state benefits and pensions. As an employee she would also be entitled to childcare vouchers and a pension contribution.

Run it all past your accountant as there may be specific elements of your personal circumstances that effect the best advice for you.

**northernladuk** · 14 February 2014, 13:56

If you are going to start on risky ventures right from the start at least go get some professional advice and listen to them. Your accountant should be the one you are speaking to. You have to make sure you understand the situation completely before you start down this path.

**TheCyclingProgrammer** · 14 February 2014, 14:35

Originally posted by anandh79 View Post

For a startup company where both husband and wife as a director and 50% shareholder and only the husband working,is it legal or does it deemed to be income splitting?

There is no such thing as "income splitting" from a legal perspective. It's a term HMRC and the government like to use, often with the implication that it is wrong.

There are lots of debate around this because the settlements legislation that HMRC have used in the past to challenge this (mostly, but not entirely unsuccessfully) is ambiguous in places and relies heavily on case law to be interpreted. Settlements generally apply to gifts of shares between spouses/civil partners (unless the exemption applies, see below) or children. It doesn't generally apply to unconnected people but it potentially can (it can apply between any two people where the settlor retains an interest in the property or derived income).

However, one thing that most accountants will agree is that spouses/civil partners can split their shareholding and share the profits as long as the shares are ordinary shares with full voting and capital rights and are not soley a gift to income (and watch out for dividend waivers as they can be seen as a gift of income in their own right, irrespective of the gift of shares). The precedent for this was set by the Arctic case over 5 years ago.

Some accountants might advise against giving your spouse more than 50% as this might seem pretty aggressive but I'm still not sure there's any legal basis that HMRC could use to challenge this.

You can also employee your spouse and pay them a salary but it has to be reasonable for the amount of work performed; if HMRC challenge a salary as excessive it can be disallowed for corporation tax relief. But this is completely separate to being a shareholder.

If your spouse has shares, you should definitely consider making them a director/company secretary/employee, even if you pay them a minimal wage, to ensure that they qualify for entrepreneurs relief on their shares if you wind the company up (they will need to have been an employee/officer for at least a year prior to winding up). I mention this as people tend to forget this point and it could cost you quite a bit of tax if you don't (especially if spouse is 50% or more shareholder)!

To echo NLUK, speak to your accountant before doing this because it has to be done properly!

**silentbull** · 14 February 2014, 16:58

Thanks All for the replies.

**Wanderer** · 14 February 2014, 22:30

Originally posted by anandh79 View Post

Please throw some light on effective way to minimise tax and any problems putting my wife as both Director cum Shareholder. Is there any benefit of just keeping her as shareholder and not as Director? I am confused on this as well.

Presuming she has no other income, make her a 50% shareholder and also pay her a salary up to the limit where she would have to pay PAYE. If she is genuinely working for the company then this is completely OK and that is the way a large number of husband and wife companies operate so don't worry about it.

Have a talk to an accountant about it first though...

**TheCyclingProgrammer** · 14 February 2014, 23:01

Originally posted by Wanderer View Post

Presuming she has no other income, make her a 50% shareholder and also pay her a salary up to the limit where she would have to pay PAYE. If she is genuinely working for the company then this is completely OK and that is the way a large number of husband and wife companies operate so don't worry about it.

Even though the situation with shares between spouses is fairly well known, you have to be careful with salaries.

Whilst it's probably unlikely to be challenged if the salary is below the tax allowance threshold, any salary must be reasonable compensation for the work done. If HMRC consider it excessive then there is a chance they will disallow corporation tax relief on the salary, or the excessive portion at least (they would use the excessive nature to claim the salary doesn't meet the wholly and exclusively rule).

http://www.hmrc.gov.uk/manuals/bimmanual/BIM37700.htm

Of course, the question is how do you determine what is excessive and what isn't? How much, for instance, is simply being a director or co. sec worth?

**Wanderer** · 15 February 2014, 00:47

Originally posted by TheCyclingProgrammer View Post

How much, for instance, is simply being a director or co. sec worth?

£7696 per year.

Director Vs Shareholder