Husband and wife companies – tax on dividends
By Stuart Hair, JRW CA Tax Team
You’re about to form a new company of which you’ll be the main income generator. To save tax your spouse will own shares in the company. Should you subscribe for shares and give some to them, or should you both subscribe?
The example below demonstrates why HMRC was so keen to argue that the income generating spouse should be taxed on all dividends paid by the company.
Jack is a consultant who’s about to go freelance working through a company. He expects to generate profits of around £170,000 per year (£137,700 after corporation tax). Jill doesn’t work. If Jack owned all the shares in the company and took all its profits as dividends, he would pay income tax of £35,227 but if half the shares were owned by Jill, their joint tax liability on the same income would be roughly halved to £17,577.
Some couples are being over cautious or careless about splitting dividend income so that either they miss out on big tax savings or get caught by the anti-avoidance rules which nullify any tax saving. Something that especially seems to cause confusion is whether or not both spouses must own shares when the company is formed or whether income splitting is equally effective if one spouse acquires all the shares and then gives some to the other.
The answer to the question is that either arrangement is OK and will be effective in splitting the income for tax purposes.
In essence, where one shareholder is wholly or mainly responsible for generating a company’s income and allows their spouse to receive a share of it either by transferring shares to them or allowing them to subscribe for them when the company is formed, it counts as a ‘settlement’, broadly speaking this means as a gift.
Planning how many shares each spouse should own for maximum tax efficiency can be tricky as the company’s and each spouse’s income is likely to change from year to year. For this reason consider issuing alphabet shares to each spouse so that dividends for each can be varied.
Whichever method you choose, it will be effective in splitting the tax bill on dividends between you. Consider creating different versions of ordinary shares, so-called alphabet shares, so that dividends for each spouse can be varied to account for changing circumstances.