Q. I am the sole director and shareholder of my own limited company and I heard about the tax advantages of bringing my spouse into the company, can you explain these advantages?
A. One of the main benefits of bringing your spouse into the company as a director and as a shareholder is that the shares can be held between the spouses in whatever proportion the directors wish, most commonly 50:50. If shares are transferred from one spouse to another, this is deemed to have been taken place at “no gain no loss”, meaning that no capital gains tax will be payable on the transfer of the shares.
For the directors, the dividend allowance is available which taxes the first £2,000 worth of dividends at 0%. If both spouses were shareholders, this would mean that they could take up to £4,000 out of the company without having any personal tax implications. If the company wanted to declare dividends in excess of the £2,000 allowance, providing they were not covered by the personal allowance, they would be taxable at the basic rate of 7.5%. If the dividends then exceeded the basic rate band, they would be taxed at the higher rate of 32.5% and finally the additional rate of 38.1%, if they exceeded the higher rate band.
Usually, the directors of the company will receive a small salary for National Insurance purposes and this amount will be deducted in the profit and loss account within the company accounts. This will then reduce profits and subsequently reduce the corporation tax payable by the company at 19% (17% from April 2020). If the company was to appoint the spouse as a director, an additional salary could be paid to the spouse, provided this was commensurate with duties they performed and this would further reduce the profits for the company reducing the corporation tax payable.
However, individuals should be aware that arrangements like these may cause unwanted attention from HM Revenue & Customs, in that they may view this as ‘income shifting’. This is broadly defined as an individual carrying on a business, and then transferring part of that business to their spouse which allows them to take a share of the profits made, via dividends to reduce the overall tax payable by the spouses collectively.
There have been a number of high profile cases regarding this, most notably the ‘Arctic Systems’ case. In this case, the taxpayer won and successfully argued that the income shifting provisions do not apply, however advice should always be sought prior to undertaking any transfers in business to ensure that the above rules do not apply.
There are several factors that should be consider in relation to all of the above, and detailed advice, taking into account individual circumstances, should always be obtained.
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