Reply to: wife as a shareholder

[TheCyclingProgrammer]

In my case my wife has part time job where her salary is likely to increase in the future. It will probably be worth me allocating her shares for the rest of this tax year (50/50) but next year her salary would mean that 50/50 is no longer the most tax efficient split (and then there are the new dividend changes). I'm assuming that HMRC wouldn't look kindly if I reduced her shareholding next year.

So start with a lower shareholding now. Don't lose sleep over not being able to extract the maximum for this tax year.

[TheCyclingProgrammer]

If you did it to pay your spouse £5k a year and nothing more, then it would be a very expensive test case.

But that's never stopped HMRC before.

Indeed.

[northernladuk]

Well, legislation has to either encompass all companies or distinguish between them. That's why I said that what you suggested would be workable if they could define a PSC. If they did that, then they could bring in a rule like you suggested for PSCs only. Otherwise, the rule would have to apply to my wife owning 80% of a shop, too.

Since they still haven't figured out how to legally define a PSC, I don't think your suggestion is workable. It doesn't make sense for us if we buy the corner shop, and they haven't figured out in legislation how to distinguish between your contracting business and our corner shop.

Ah right.. Should be the wife of any business really. Even more so if there is a tangible connect such as that investment.

[WordIsBond]

Not sure how your wife owning 80% of a shop has to do with our situation though.

Well, legislation has to either encompass all companies or distinguish between them. That's why I said that what you suggested would be workable if they could define a PSC. If they did that, then they could bring in a rule like you suggested for PSCs only. Otherwise, the rule would have to apply to my wife owning 80% of a shop, too.

Since they still haven't figured out how to legally define a PSC, I don't think your suggestion is workable. It doesn't make sense for us if we buy the corner shop, and they haven't figured out in legislation how to distinguish between your contracting business and our corner shop.

[northernladuk]

If they can figure out how to define a PSC, they could probably do something like that. But there are so many different kinds of companies. If my wife and I start a company and use it to buy the shop down the street, is there any reason my wife can't own half or more of the company? Even if she never works in the shop, and only does the bookkeeping? What if she put up 80% of the capital? What if the money came out of our joint savings? What if it came out of my savings and i gave her the money to make the capital investment so it could be in her name? Why is any of that really any business of HMRC? As long as it is actual ownership of the company, so that she owns an asset even if we divorce, has voting rights, gets a proportional payout if we sell the company, etc, how can or should they have anything to say about it?

This kind of thing only makes sense if your company is you, rather than a separate entity. If your company is a separate entity, then of course other people can own part of it. If your company is really only just you (a PSC), then no, it doesn't make sense for other people to own part of it.

Maybe not but it's been agreed that the wife should be rewarded somehow for the intangible elements. Wage isn't efficient and she doesn't do work so is not an option so shares and ownership is the only way. With a class B she isn't actually owning the company either so if HMRC will take a pragmatic stance on this it could be an option.

Not sure how your wife owning 80% of a shop has to do with our situation though.

[WordIsBond]

I wonder what would happen if HMRC accept this 5k payment (exactly how to be sorted later) and concedes that this is a reasonable amount for that support but in return clamps down hard on any share structures where the wife is paid 11k wage and has anything more than a 30% split. That way they would satisfy the fact that the wife can receive reasonable remuneration for her support and closes the loopholes where half the dividend goes to the wife.

If they can figure out how to define a PSC, they could probably do something like that. But there are so many different kinds of companies. If my wife and I start a company and use it to buy the shop down the street, is there any reason my wife can't own half or more of the company? Even if she never works in the shop, and only does the bookkeeping? What if she put up 80% of the capital? What if the money came out of our joint savings? What if it came out of my savings and i gave her the money to make the capital investment so it could be in her name? Why is any of that really any business of HMRC? As long as it is actual ownership of the company, so that she owns an asset even if we divorce, has voting rights, gets a proportional payout if we sell the company, etc, how can or should they have anything to say about it?

This kind of thing only makes sense if your company is you, rather than a separate entity. If your company is a separate entity, then of course other people can own part of it. If your company is really only just you (a PSC), then no, it doesn't make sense for other people to own part of it.

[northernladuk]

Ultimately, the Arctic case hinged on determining whether a gift of ordinary shares was a right to income or more than that, in order for the spouse exemption to apply. As it found that ordinary shares with full voting rights and right to capital distributions meant they were more than just a right to income, the spouse exemption applied.

So what difference does it make if the shares are different classes so long as they are ordinary shares with equal rights attached to them? I don't think the settlements legislation would apply here.

That's not to say of course that HMRC wouldn't try and find some other means of attack (GAAR?) so I do agree in principle that this approach is "riskier" than sticking with on class of shares, in so much as you could end up being the first "test case" for an attack on this approach.

Some interesting further discussion here if you're bored:
Alphabet shares | AccountingWEB

Personally, I would just speak to your accountant and try and figure out the optimum split between you and your wife (which will need to take into consideration her current earnings) and split your ordinary shares accordingly. A lot of people do a 50/50 split but it doesn't have to be that (my wife only has 25% for instance).

Thinking about this in relation to what TF said about the 5k tax free......

Going back to the basics of the Arctic case, it was agreed that remuneration to the wife because she supports the husband in running the company was fair. I can't work away without her support so why shouldn't she get something for that.

I wonder what would happen if HMRC accept this 5k payment (exactly how to be sorted later) and concedes that this is a reasonable amount for that support but in return clamps down hard on any share structures where the wife is paid 11k wage and has anything more than a 30% split. That way they would satisfy the fact that the wife can receive reasonable remuneration for her support and closes the loopholes where half the dividend goes to the wife.

[WordIsBond]

My understanding was that different share classes do not have same rights as Ordinary shares. They only have right to income which may fall foul of settlements legislation. I would avoid.

This may or may not be true. There are many different variables that can be used, here's a very brief discussion of some of them.

My company's class B shares have the same voting rights and capital rights as our Class A shares. If they don't have those rights, you could fall foul of settlements legislation, but as always, it depends on the situation.

You can gift ordinary shares to your wife by having a directors board meeting, which will get reported via the annual companies house return. Paying bonuses/Salary may fall under auto-enrolment pension rules unless you appoint her as a Director.

You can personally gift ordinary shares without a directors' meeting, as well.

The biggest issue, as always, is whether the marriage is secure and what you are putting at risk when you do this. If the marriage isn't rock-solid, just remember, you are giving away part of your company. Of course, if you always disburse all company funds every year, it's not that big of a deal. You can always just stop working for that company and start another one, if things fall apart between you and your wife. But if you retain a large warchest in your company, in giving shares away you are also giving away future rights to a big chunk of that warchest. If she is going to run off with your accountant and spend it on a villa in Spain for the two of them, don't give her the shares.

[administrator]

I am not saying class B is definitely the right way, or wrong way to do it. My account recommended it so it's his PI on the line if it goes tits up

Cheers for the link to the Patmore thread on AW. I am not sure that class of shares is likely to throw an investigation any more than any other husband and wife structure. But IANAA so your pays your money and you takes your choice - and you make sure your accountant informs you as to how it should be arranged and that he has PI. I also have investigation insurance and say a little prayer every night that the finger won't fall on me!

[eazy]

Options to consider

My understanding was that different share classes do not have same rights as Ordinary shares. They only have right to income which may fall foul of settlements legislation. I would avoid.

You can gift ordinary shares to your wife by having a directors board meeting, which will get reported via the annual companies house return. Paying bonuses/Salary may fall under auto-enrolment pension rules unless you appoint her as a Director.

[northernladuk]

If you did it to pay your spouse £5k a year and nothing more, then it would be a very expensive test case.

But that's never stopped HMRC before.

Absolutely but if it becomes a standard action carried out by every contractor the one test case would shut everyone down so considerable amounts...Particularly if it can be applied retrospectively

[northernladuk]

In my case my wife has part time job where her salary is likely to increase in the future. It will probably be worth me allocating her shares for the rest of this tax year (50/50) but next year her salary would mean that 50/50 is no longer the most tax efficient split (and then there are the new dividend changes). I'm assuming that HMRC wouldn't look kindly if I reduced her shareholding next year.

It might attract unwanted attention and is not recommended to do regularly or to close together as it looks like you are trying to set the levels to avoid tax and is not business driven...which is what you are doing... So correct.

[Bozwell]

In my case my wife has part time job where her salary is likely to increase in the future. It will probably be worth me allocating her shares for the rest of this tax year (50/50) but next year her salary would mean that 50/50 is no longer the most tax efficient split (and then there are the new dividend changes). I'm assuming that HMRC wouldn't look kindly if I reduced her shareholding next year.

[TheFaQQer]

That's not to say of course that HMRC wouldn't try and find some other means of attack (GAAR?) so I do agree in principle that this approach is "riskier" than sticking with on class of shares, in so much as you could end up being the first "test case" for an attack on this approach.

If you did it to pay your spouse £5k a year and nothing more, then it would be a very expensive test case.

But that's never stopped HMRC before.

[TheCyclingProgrammer]

Ultimately, the Arctic case hinged on determining whether a gift of ordinary shares was a right to income or more than that, in order for the spouse exemption to apply. As it found that ordinary shares with full voting rights and right to capital distributions meant they were more than just a right to income, the spouse exemption applied.

So what difference does it make if the shares are different classes so long as they are ordinary shares with equal rights attached to them? I don't think the settlements legislation would apply here.

That's not to say of course that HMRC wouldn't try and find some other means of attack (GAAR?) so I do agree in principle that this approach is "riskier" than sticking with on class of shares, in so much as you could end up being the first "test case" for an attack on this approach.

Some interesting further discussion here if you're bored:
Alphabet shares | AccountingWEB

Personally, I would just speak to your accountant and try and figure out the optimum split between you and your wife (which will need to take into consideration her current earnings) and split your ordinary shares accordingly. A lot of people do a 50/50 split but it doesn't have to be that (my wife only has 25% for instance).