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

MarieNoelle

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

paulstafford

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.

MarieNoelle

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?

paulstafford

If HMRC asserted the husband is shifting his income. How would you argue the contrary?

MarieNoelle

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

paulstafford

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.

MarieNoelle

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]

paulstafford

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.

MarieNoelle

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….