Husband and wife businesses

There are tax planning opportunities available to husband-and-wife businesses, but care needs to be taken. If you are in the Chesterfield area, Page Ivy can guide you through the options. This article provides an overview...

HM Revenue & Customs (HMRC) has shown great interest in businesses where both spouses are owners (either as shareholders or partners) but one spouse is considerably less active within the business than the other.

Their weapon was the settlements legislation which HMRC will seek to apply where one spouse (the settlor) enters into an arrangement to divert income to the other spouse and in the process tax is saved. There has to be an element of bounty (i.e. “something for nothing”).

On the face of it, all transfers between husbands and wives could potentially be settlements. However, there is a statutory exemption where property passed to a spouse is an outright gift, unless

  • the gift does not carry the right to the whole of the income arising (i.e. income could still be payable to either spouse), or
  • a gift between spouses is wholly or substantially a right to income.

The legislation is not new, but was originally enacted in the 1930s and brought up to date in the 1990s.

Legal testing

The well publicised case of Jones v Garnett (Arctic Systems Ltd) was decided in the taxpayers’ favour. The House of Lords found that, although the wife’s share in the company was a settlement, it was not caught because it had been an outright gift.

It may be helpful to consider the basic situations which may involve income shifting:

  • Main earner drawing a low (non-commercial) salary leading to enhanced profits from which dividends can be paid to spouse shareholder.
  • Differing classes of shares enabling dividends to be paid only to spouse paying lower rates of tax.
  • Dividends being waived so that higher dividends can be paid to spouse paying lower rates of tax.
  • Dividends paid on shares that carry only restricted rights.

Income shifting is less likely to be in point:

  • If the shares have considerable capital value.
  • If the main earner draws a commercial salary before dividends are declared.

If income shifting is proven:

The income of the lower taxpayer is taxed as income of the donor of the gift (the settlor).

Commentary

Until the Arctic Systems case was finalised the application of the settlements legislation was largely untested. Several anomalies had been put forward:

  • Settlements by husbands on wives (and vice versa) are subject to rules which do not apply to settlements between any other relatives or friends. It is therefore discriminatory against married couples.
  • This approach contrasts sharply with the freedom available to married couples or civil partners in transferring assets between themselves without any capital gains or inheritance tax liabilities.
  • HMRC have sought to extend the application to partnerships, even though a partnership share is not a transferable asset.
  • Unlike the view taken by divorce courts, HMRC’s stated approach completely ignored the sacrifices that may be made by the “non-working” spouse in enabling the business to function at all.
  • For instance agreement to personal (matrimonial) assets being pledged as security for the purposes of the family business, as well as looking after the home and children etc.
  • Ordinary shares do not carry with them a “right” to income; they carry a right to participate with other shareholders in the running of the company and to share in whatever assets remain in a winding up.
  • Although shares transferred to a spouse may be considered to be substantially a right to income in the early days of a company, a successful company may well grow so that eventually the capital value of the shares may greatly outweigh the dividends received.

Prevention

  • A stronger position may be created if husband and wife both subscribe for shares when the company is formed and both are directors from the outset.
  • Make sure all shares carry voting and capital rights.
  • There is an argument for husband and wife receiving equal directors’ fees rather than salaries and therefore not being employees, particularly if this is evidenced by a commercial agreement.
  • The position is also strengthened if husband and wife receive equal dividends.
  • Aim to have the “non-earning” spouses involved in the business as much as is practical, thereby giving full value for any money received.
  • A company with substantial assets which generate income, or retained profits, is not so likely to be caught.

If you are a husband-and-wife business in the Chesterfield area, the team at Page Ivy can help you. Contact us today.

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After completing her A-Levels in 2017, Rebecca started her career in accounting by joining the Page Ivy team. Since then she has completed levels 2 and 3 of the AAT qualification and is currently studying towards level 4.

In the office, Rebecca works with our clients to assist them in preparing their VAT returns, assists with Xero Cloud-based bookkeeping and Accounting and is also trained in all matters of payroll.

In her spare time, Rebecca likes to, spend time with her friends and family, train dogs and more recently, has started to learn Spanish.

Since school Charlie has always had an interest in accountancy and followed up on his career aspirations by joining Page Ivy in 2017.

After three years of studying, Charlie is nearing completion of his AAT level 4 qualification and is looking to start his ACCA training imminently.

Charlie deals with the preparation of Limited Company, Sole trader and Partnership accounts along with preparing VAT and MGD returns.

In his spare time, Charlie enjoys watching football and spending time with his partner, friends, and family.

Danielle joined the Page Ivy team back in 2013 as an AAT Trainee, now qualified she is responsible for managing our Payroll  Bureau.

Her role includes processing weekly, bi-weekly, and monthly payroll runs, corresponding with HMRC on behalf of our clients,  preparing and submitting CIS 300 returns, assisting clients with all areas of payroll, HR, and Administration.

In her spare time, Danielle enjoys climbing, spending time with family and friends, and going on long country walks with her partner and dog.

Declan is the newest member of the Page Ivy team, starting with us in 2020.

Declan is currently studying towards level 2 of his AAT Apprenticeship and in the office, is getting to grips with data entry and analysis.

In his spare time, Declan enjoys country walking with his family and dog, sports events and more recently, learning to play the piano!

Megan joined our team in 2014 and has been ensuring that the Page Ivy office runs smoothly ever since.

Her role includes managing the team and their diaries,  handling client queries, and assisting with Administration.

Megan is a Xero certified Payroll advisor, meaning that when Danielle is on leave, Megan is on hand to run our payroll department.

Megan has two children, Isabella and Felicity, who like to keep her busy! In her spare time, she likes to keep fit, spend time with her family and online shop!

Abby started her career in accounting in 2009, working for a small practice in Chesterfield, alongside studying for her AAT qualification.

After three short years, in 2012 the opportunity arose to become Director of Page Ivy Accountants and she hasn't looked back!

Building long-lasting client relationships are of utmost importance to Abby, she has a passion for providing a high level of customer service and ensuring that our clients feel valued.

Abby is responsible for overseeing the preparation of VAT returns and MGD return prepared by the Page Ivy team; along with providing personal tax advice to a wide range of clients.

 

In her spare time, Abby enjoys, traveling, reading, and going to the gym.

Edward joined the team as a school leaver in 2012.  From here he went on to study Business Administration, AAT, and finally progressed on to complete his  ACCA qualification 2019.

Edward is a knowledgable, pro-active Senior accountant, who prides himself on providing high quality, in-depth, technical advice in a manner that is easily understood by his clients.

He is responsible for the preparation of Sole trader, Partnerships, and Limited Company accounts. As well as monthly and quarterly management accounts and conducting business reviews.

In his spare time, Edward likes to spend time with his friends and family,  spending time in his local pub and watching Derby FC collect 3 points.

 

Gareth started his career in accountancy in 2002. Since then he has worked in both small and medium-sized accountancy practices, working with a variety of clients from small businesses to advising quoted companies on Corporate Tax compliance and specialist claims, such as for Research and Development allowances. He places high importance on technical expertise, believing this to be essential to ensure clients can be safe in the knowledge they are fully compliant with HMRC’s requirements while minimising their tax liabilities. This is reflected in him being a fully qualified member of the Chartered Institute of Taxation, and a fellow of the Institute of Chartered Accounts in England and Wales.

He joined Page Ivy in 2012, since then he has taken responsibility for overseeing the preparation of clients Sole Trader, Partnership and Limited company accounts, as well as clients personal Self Assessment Tax Returns.

Alongside Abby he hopes to continue to develop both the technical expertise within the firm, and see the business continue to grow from strength to strength.

Outside of work Gareth has served as deputy leader of the town council, enjoys eating out, and fishing.

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