Reducing tax through a partnership with spouse

ceivegz

Hi, I'm currently a higher rate tax employee and my wife is not currently in employment but as the kids are all in school we've decided to set up a business (as a partnership) which she will mainly run but which I will help out with at weekends.

Because we likely to miss the peak period of business for the current tax year (our customers will mainly be couples getting married who'd book our service well in advance of their wedding) our revenues will likely be very low in the current tax year but our set up costs (equipment, advertising, wages etc) will be very high.

An accountant told me that our partnership can state that we can split the benefits/liabilities of the partnership any way we like so that they don't necessarily need to be 50/50, they could be split 90/10, which would allow me to offset 90% of a loss in the first financial year of approximately £20,000 against my own tax.

Given that my wife would be doing most of the work (I'm already employed) would it be reasonable for our partnership to pay her say around £6000-£10,000 per year (and nothing to me), which would be reflective of the hours put in to the business, thus increasing the loss of the partnership but enabling me to offset 90% of £26,000-£30,000 against my regular higher rate earnings? I would still be in the higher rate tax band and my wife would still have most of her earnings within her personal allowance so our combined tax burden would be quite significantly reduced. :j

Pennywise

ceivegz wrote: »

Hi, I'm currently a higher rate tax employee and my wife is not currently in employment but as the kids are all in school we've decided to set up a business (as a partnership) which she will mainly run but which I will help out with at weekends.

Because we likely to miss the peak period of business for the current tax year (our customers will mainly be couples getting married who'd book our service well in advance of their wedding) our revenues will likely be very low in the current tax year but our set up costs (equipment, advertising, wages etc) will be very high.

An accountant told me that our partnership can state that we can split the benefits/liabilities of the partnership any way we like so that they don't necessarily need to be 50/50, they could be split 90/10, which would allow me to offset 90% of a loss in the first financial year of approximately £20,000 against my own tax.

Given that my wife would be doing most of the work (I'm already employed) would it be reasonable for our partnership to pay her say around £6000-£10,000 per year (and nothing to me), which would be reflective of the hours put in to the business, thus increasing the loss of the partnership but enabling me to offset 90% of £26,000-£30,000 against my regular higher rate earnings? I would still be in the higher rate tax band and my wife would still have most of her earnings within her personal allowance so our combined tax burden would be quite significantly reduced. :j

No, you can't increase the loss that way in a partnership. As a partnership, you have to share the profit/loss in whatever way you think, but you can't increase the loss to one by giving a profit to the other. In your scenario, your best option is allocate all the loss to yourself.

The alternative is for you to set it up as a sole trader, employ your wife and give her a wage to use her allowance. Then it's a real expense, which increases the loss to you, hence increases your loss relief.

ceivegz

Pennywise wrote: »

No, you can't increase the loss that way in a partnership. As a partnership, you have to share the profit/loss in whatever way you think, but you can't increase the loss to one by giving a profit to the other. In your scenario, your best option is allocate all the loss to yourself.

The alternative is for you to set it up as a sole trader, employ your wife and give her a wage to use her allowance. Then it's a real expense, which increases the loss to you, hence increases your loss relief.

Thanks, but is there a specific reason why one of the partners can't be paid while the partnership is yet to make a profit? Or is it that both partners would have to be paid?

tebthereb

The partners can take a "salary" but with a partnership that term does not mean much as the partnership is transparent for tax purposes; the partners are the partnership and they are taxed rather than the partnership itself..

Hence salary to partners is not tax deductible. They are "drawings" on account of profit share.

So, say you have profit of £20k and your wife took a salary of £10k. Your loss is still £20k for tax purposes. When you allocate profit the £10k taken by your wife is her first share of profit. You could then share the remaining £10k between you as you please.

What previous respondents are saying that you cannot generate a greater loss for one partner. So if you had a loss of £20k and your wife took £10k out, you can still essentially only allocate £20k of losses. This makes sense; otherwise you could pay her a huge salary and create a huge loss for yourself despite there being no actual change in the partnership's profitability - or lack of.

If you are expecting losses and you're a higher rate taxpayer then as has been said there may be better options. You said you spoke to an accountant; you should probably engage one. PM me if you like.

[Deleted User]

I agree with all of the above in that there would be a 'reallocation of loss' on the partnership. In simple terms, no partner can be deemed to have made a profit where the partnership overall has made a loss. However, the main issue would appear to be, as is frequently the case, that the op appears to believe that drawings are a deductible expense.

pay her say around £6000-£10,000 per year (and nothing to me), which would be reflective of the hours put in to the business, thus increasing the loss of the partnership

The partners can take whatever they like out of the business in whatever ratio - it will have no effect on the profits or losses. The bank manager may not be so happy though!

ceivegz

So, it sounds like the best option might be for me to be a sole trader and employ my wife so as to pay her a salary and then convert to a Partnership once it looks like it's going to start becoming profitable. Is there any reason I wouldn't be able to do this?:)

Cook_County

What does your employment contract say about another job & your hours outside of your existing job?