In the never-ending quest to reduce tax bills, many owners of small private limited companies have tried to organize their share ownership so that, for example, a non-taxpaying or starting taxpaying spouse receives some of the dividends declared. The aim of the endeavor is to try and reduce the ultimate overall income tax liability on those dividends. It is accepted that a non-taxpaying spouse cannot reclaim any tax credit on those dividends but his or her tax liability will still be lower than a higher rate taxpaying spouse.

The organization of the shareholding has been by one of two methods:

1. Joint ownership of each share, possibly with an imbalanced ratio, for example the main business owner could own 90% of each share with the spouse owing 10%. This could be to reflect the fact that the 90% owner actually represented the business, while the 10% owner did not play any active part in it. Each share would be held under a tenants in common arrangement.
2. The working spouse and the non-working spouse each own some of the shares, such that an individual share is not jointly owned.

If we concentrate on the first of these methods for the moment, the tax liability is reduced by an election for the actual percentage ownership in the shares to divide the dividends in that proportion not being made. This leaves the assumption of 50/50 ownership as far as tax on the dividends was concerned.

It can be seen, therefore, that the lower tax-paying spouse became responsible for the income tax on an extra 40 % of any dividends declared with a commensurate reduction in the percentage of any dividends assessed on the higher-level tax-payer.

This government has had enough of this tax avoidance and has decided to curb it.

As from this tax year, the actual split of the ownership of shares will have to be declared to the Inland Revenue so that, in the example above, 90% of the dividends declared will be assessable on the higher taxpayer and 10% will be assessed on the lower tax-payer.

Turning now to the second method, actual whole shares owned by each spouse, the Inland Revenue has been after this area of so-called tax avoidance for some time.

The Inland Revenue has, for a number of years, sought justification by the amount of hours worked where a spouse has been paid a salary from the business.

This is now to be extended to dividends.

What the Inland Revenue is now doing where it perceives an abuse is to assess the working spouse for income tax on the dividends even though legally those dividends belong to another spouse by reason of share ownership.

If you feel that this may affect you or your company, please call us.

We take great pride in our service, and would be delighted to invite you for a free 1 hour, no obligation meeting at our comfortable offices. Simply call us  on 020 8346 0391 to arrange a mutually convenient time.

This web-site was last updated on 13/06/2008

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