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Directors of a small ltd co - only the spouse has salary and dividends

MarieNoelleMarieNoelle Trusted RegularHampshire/Surrey borderModerator, MAAT, AAT Licensed Accountant Posts: 1,431
A small limited co has two directors - husband and wife. He is a consultant for the ltd co, dealing with clients and bringing all the business, but doesn't get paid a salary; he is otherwise employed full time by another company (the employer is aware of his ltd co) and a higher rate tax payer.

The wife only works for the ltd co and draws a small salary equal to her annual personal allowance. She does the admin and bookkeeping for their company, so the small salary could be justified.

The husband has A shares (voting rights but no cash distribution) and the wife has B shares (cash distribution), and they declare dividends up to the basic rate band. So the husband doesn't get any income from the ltd co.

Is this a valid set up or could this be considered as income shifting between spouses? I am pretty sure there is no obligation for the directors to be paid a salary however I have not come across this kind of set up before and would appreciate your advice on this,
Thank you
MN

Comments

  • paulstaffordpaulstafford Feels At Home Registered Posts: 126
    Really depends the B shares. If they are solely to receive dividends and don't bestow the holder any other rights eg voting rights then you could have a problem.
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderModerator, MAAT, AAT Licensed Accountant Posts: 1,431
    Thanks Paul for your reply. I will check with the directors. Does it mean that if they both have voting rights this set up is ok?
  • paulstaffordpaulstafford Feels At Home Registered Posts: 126


    If HMRC asserted the husband is shifting his income. How would you argue the contrary?
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderModerator, MAAT, AAT Licensed Accountant Posts: 1,431
    Ok, so both type of dividends carry voting rights and they were advised to use this set up by their previous accountant.
    What would be your advice?
    Thanks
  • paulstaffordpaulstafford Feels At Home Registered Posts: 126
    So the A shares owned by husband B shares owned by wife and both shares have exactly the same rights and value. We assume the B shares were gifted outright and the dividend voted is voted on B shares up to wife's basic rate threshold is paid into her own personal bank account., not to a joint account nor his own account, nor paid into her account and then transferred back into the husbands account.

    What HMRc could say is , when the husband does not take a dividend, but the wife does, he has gifted her a right to income i.e. his rightful share of the profits of the company. In this case the settlements provisions could apply.

    http://www.hmrc.gov.uk/manuals/tsemmanual/tsem4000.htm

    You have to find a way to argue that he hasn't gifted her a right to income for it not to apply.
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderModerator, MAAT, AAT Licensed Accountant Posts: 1,431
    Thanks again Paul, I think I have found something (TSEM4205 Example 6) that seems to best fit my case. I will also check they are paying the dividends into the wife's own account.
    MN [h=1][/h]
  • paulstaffordpaulstafford Feels At Home Registered Posts: 126
    Have a look at TSEM4225 - Example 13. I think this a close fit to your client.

    Perhaps a solution is to gift the A shares to the wife? She becomes sole shareholder and therefore has the right to 100% of the dividends.
  • MarieNoelleMarieNoelle Trusted Regular Hampshire/Surrey borderModerator, MAAT, AAT Licensed Accountant Posts: 1,431
    Thanks again Paul, sorry it's taken so long to reply - I hadn't seen your above comment (still struggling with the forum new look!).
    I asked her to go back to her accountant to clarify the reasoning behind the set-up. I also queried why she wasn't made a 100% shareholder in the first place.
    will keep you posted….
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