Reply to: Changing wifes shareholding

[Zoiderman]

My wife flits in and out of contracting, so maintains a 50% share. However, I was informed it would be immaterial were she nto to do that, that artic makes nonsense of it; anyone can have shares in a company and collect a dividend from it.

I also pay her minimum wage for back office work.

I can't see any legal issue with any of that.

We made her redundant from our first company, paying her £30k tax free. All legal.

[Bugbait]

Be interesting to see if there are any cases brought before courts to test this in the near future.

When I set up my company both the wife and I were contracting and she generated more revenue than me. The salaries, pension contributions and dividends have always been 50/50. After a few years she stopped working to look after our child (I offered to be a stay at home father since my work bores me but she declined). It's been a couple of years now and we still retain that structure. When she was working she generated hundreds of thousands in revenue for the company so I don't personally see the problem.

Of course HMRC don't care what I think though...

[psychocandy]

When I set up my company, it was just before the Arctic judgement, and at the time I was advised not to give my wife any shares in the company.

This has always irritated me a bit - she shares in the risks associated with the company, she does a lot of the financial stuff (without pay), and it would be nice if she could share in the ownership to some extent.

If I gave her some shares now, what would be the likely impact of that?

Speak to your accountant but I reckon you're ok to split the shares.

[THEPUMA]

When I set up my company, it was just before the Arctic judgement, and at the time I was advised not to give my wife any shares in the company.

This has always irritated me a bit - she shares in the risks associated with the company, she does a lot of the financial stuff (without pay), and it would be nice if she could share in the ownership to some extent.

If I gave her some shares now, what would be the likely impact of that?

The likely impact, assuming that you are a higher rate taxpayer and she is a basic rate taxpayer, is that you will save some tax. Possibly 25% of the amount of the dividend paid to her.

PUMA

[FunctionCall]

When I set up my company, it was just before the Arctic judgement, and at the time I was advised not to give my wife any shares in the company.

This has always irritated me a bit - she shares in the risks associated with the company, she does a lot of the financial stuff (without pay), and it would be nice if she could share in the ownership to some extent.

If I gave her some shares now, what would be the likely impact of that?

[psychocandy]

Agreed but blatently using this vehicle as a tax avoidance scheme is not the way.

NLUK - I can sort of see what your saying and I know this is your standpoint for most tax matters. I agree - stick within the spirit of things and you wont get into trouble seems like one approach to take.

I cant help thinking that 'most' people wont do it like this though. In fact, AFAIK, all the big contractor accountant firms will recommend you pay yourself a smallish salary and then split the shares with your spouse if it works out better.

Yes, it is avoiding tax but it is legal after all. HMRC might not like it but should you care if it upsets them? Personally, I dont unless its likely to cause me hassle/money in the long term.

To be honest, I have changed my opinion slightly with regards to the tax situation with income shifting - IMHO you're right there - it is taking it a bit far to change the share split to suit every year or so. Asking for trouble I think.

[northernladuk]

Thats one of the problems with family tax isn't it. You may share half a house with your wife, half a car, she can get half your assets on divorce, all of your assets on death - but half a share in a business you work in to put bread on the table while you are both living together in matrimonial bliss.....oh no.

Agreed but blatently using this vehicle as a tax avoidance scheme is not the way.

[Greg@CapitalCity]

I think 99% cases of contractors splitting income shouldn't be allowed personally...

Thats one of the problems with family tax isn't it. You may share half a house with your wife, half a car, she can get half your assets on divorce, all of your assets on death - but half a share in a business you work in to put bread on the table while you are both living together in matrimonial bliss.....oh no.

[kempc23]

Are you forgetting that you will have to readjust it back to the current level the year after when she is back which would make it clear you have altered it to avoid tax? If you had left it at 60/40 you could have argued a geniue change in holdings for business reasons. Unlikely to stand up when you get investigated of course.

No I hadn't forgotten that, ideally she won't go back to work.

Actually her maternity package is better than I thought, so there is no point adjusting the share split this year anyway. I will probably change the split to 50/50 at the start of the next tax year.

EDIT: If I do decide to pay her a salary, it will be a tiny one. One that is commercially realistic, so pay for an hour or two a week. And I will get her to do the actual work too

[northernladuk]

Thanks Puma for the explanation.

But maybe I'm missing something but whats the point? Surely its just as easy to pay dividends? same tax etc.

Of course, it is a way to even up things a little though if needs be in terms of income.

In my mind the difference is justification and adhering to the spirit of the rules. We can pump anything out we want by playing with the numbers, what I think is missing is which one is a genuine method of payment that will stick and not a fudge of the rules hoping we won't get caught.

Yes it may seem easier to do it one way and not the other... but is it legitimate and will stand up to the spirit of the rule? I keep saying spirit because the word of the rule is hotly contested obviously.

You see the posts people put on saying 'First timer, can I give 50% of my profit to my partner to avoid tax'. Yes they can (arguable) but haven't a clue why. There is a big difference between running a business as tax efficiently as possible and following tax loopholes blindly.

All said and done Puma's last comment is the be all and end all really. I just think people should be more aware of why they are doing as well as how.

[psychocandy]

Whether she has another job or not, the tax position will be the same. Assume the company has £5K profits and could either pay a £5K salary or a £5K dividend, either way, you would end up with £4K net (assuming she is a basic rate taxpayer). See below for illustrations:-

Scenario 1 - pay by salary

Profit before salary - £5K
Less salary - £(5K)
Taxable profit - £NIL
Corporation tax - £NIL
Tax on salary @ 20% - £1K
Net salary received - £4K

Scenario 2 - pay by dividend

Profit before salary - £5K
Less salary - £NIL
Taxable profit - £5K
Corporation tax - £(1K)
Profit available for dividend - £4K
Net dividend received - £4K
Net amount received - £4K

Yes the salary should be commensurate with the duties, which is why I mentioned in my original post the fact that she may be able to assist with the company admin. Practically speaking however, I have never once known this aspect of a client's affaits to be scrutinised.

PUMA

Thanks Puma for the explanation.

But maybe I'm missing something but whats the point? Surely its just as easy to pay dividends? same tax etc.

Of course, it is a way to even up things a little though if needs be in terms of income.

[THEPUMA]

Hasnt salary gotta reflect work done rather than made-up role though? BTW - shes got her own job as well so no point.

Whether she has another job or not, the tax position will be the same. Assume the company has £5K profits and could either pay a £5K salary or a £5K dividend, either way, you would end up with £4K net (assuming she is a basic rate taxpayer). See below for illustrations:-

Scenario 1 - pay by salary

Profit before salary - £5K
Less salary - £(5K)
Taxable profit - £NIL
Corporation tax - £NIL
Tax on salary @ 20% - £1K
Net salary received - £4K

Scenario 2 - pay by dividend

Profit before salary - £5K
Less salary - £NIL
Taxable profit - £5K
Corporation tax - £(1K)
Profit available for dividend - £4K
Net dividend received - £4K
Net amount received - £4K

Yes the salary should be commensurate with the duties, which is why I mentioned in my original post the fact that she may be able to assist with the company admin. Practically speaking however, I have never once known this aspect of a client's affaits to be scrutinised.

PUMA

[psychocandy]

I am not quite understanding this. You say you agree that anyone that says the wife is part of the business is talking crap but they you say you have a 50/50 arragement in place and your accountant is a twat for advising not to give her a max of 25%?

50/50 isn't easy to explain at all when one is an earner and the other is a tax heaven. In the eyes of HMRC this is wrong. I thought this statement covered that...



Might have read your post wrong though.....

S660A got defeated thanks to Arctic didnt it?

Family business tax - not on the cards yet.

[psychocandy]

That's unfair.

Every accountant has a different professional opinion due to how they intepret what they read, and the other types of businesses they deal with.

For example if your ex-accountant dealt with other businesses where it was clear the wife did a lot then s/he could be right from their experience saying your wife didn't do very much so shouldn't have half.

Anyway our tax laws are purposely grey so HMRC can try and exact the most out of us if they feel like it.

Professional opinion fair enough. But its not related to amount of work done is it?

Fair enough the split might be a bit dodgy but most accountants will agree its ok to do this bearing in mind the Arctic situation. I'm with one of the big ones and they OK it.

And he was a twat for many other reasons..... This was nothing.

[psychocandy]

I am not quite understanding this. You say you agree that anyone that says the wife is part of the business is talking crap but they you say you have a 50/50 arragement in place and your accountant is a twat for advising not to give her a max of 25%?

50/50 isn't easy to explain at all when one is an earner and the other is a tax heaven. In the eyes of HMRC this is wrong. I thought this statement covered that...



Might have read your post wrong though.....

Last accountant not current one told me share percentage was reliant on work done for the company - it isnt obviously.