Questions/doubts on dividends

rolleru

Hi,

I own a small ltd company which I've been using to run a part-time business. I'm the only director of this company, the only shareholder and I've been running the company for a number of years. As I'm a higher rate tax payer because of my primary work I'm using my 2K/year dividend allowance to extract money from the company leaving the remaining revenues in the company account.

What I would like to do now is to extract the greatest sum of money from the company in the most tax efficient way in one go but leaving in the company account sufficient reserves.

My understanding is that I've got two options:

1) pay myself a dividend and pay 32.5% of the amount in taxes.
2) make my wife a shareholder, give my wife a % of shares as outright gift, for example 49%, and pay a dividend to me and my wife proportional to the allocated shares.
My wife is a basic rate tax payer and I'd give her an amount of dividends such that her primary income plus dividends lays within the basic rate threshold.
I know this options could mean difficulties in case of divorce, etc but I'm taking that into account.

My doubts are:

• is option 2 a common, legal and HMRC "approved" option ? If not, what would you advise to make it so if possible ? % of shares, type of shares, rights of shares ?
  
• in order to avoid possible problems with HMRC would you go with option 1) as peace of mind despite the higher taxes to pay ?

I'll ask my accountant advices on what is best to do but before that I'm happy to hear other voices and opinions.

Thank you in advance.

 

Jeremy535897

On the face of it, what you propose (an outright gift of shares, where the company has only one class of shares), followed by a dividend paid on all shares (no dividend waivers), is a reasonably safe mechanism, and if challenged, is unlikely to make the tax bill any worse than if you did nothing. The attack on such arrangements was set out in the Arctic Systems case, which HMRC lost in 2007. A change in the law was threatened, but never materialised.

On divorce, she would probably get half anyway, whether you gave her the shares or not.

rolleru

@Jeremy535897 thank you for the feedback. You mentioned "reasonably safe" mechanism: what could be a totally safe mechanism instead if it exists ?

Jeremy535897

It does, in theory: she pays you market value for the shares out of her own funds, rather than you giving them to her. Apart from any practical problems, the main difficulty is establishing what market value is. The strategy you propose is low risk, so long as you each receive your fair share of any dividend (no dividend waivers).