Adding partner as a director

billy2shots

As things stand

- Currently in the process of restructuring the family business.

- Shortly I will be the sole shareholder and only remaining director.

-My wife has a sperate job but also helps me with certain responsibilities and is on the books PAYE.

- She is opted out of work place pension for my business but is enrolled on LGPS for her part time job.


Going forward

Once the company is solely mine I would like to make my wife a director and shareholder but with a different class of shares than me. This is for the following reasons.

- My wife could then take £2000 as a tax free divided each year. Having two classes of shares means we can be flexible with dividends. 

-A SIPP can be opened for my wife (currently LGPS only Very part time work). Paying to the SIPP to reduce Corp Tax liability and give flexibility come drawdown. 


Reasons

As well as rewarding my wife for the support she gives me and the company, it's also trying to maximise our early retirement opportunity.
Rather than building up one large Sipp (me) having 2 smaller ones must be better as from 57 to 67 we can both take the maximum tax free allowance plus maybe a little on top which would be taxed rather than say taking £25k from just the one "bigger' pot paying tax on everything over the tax free allowance figure at that time. 

Example
Pot 1 (me) £12,500
Pot 2 ( wife) £12500
Has to be much more tax efficient than

Only Pot £25,000
doesn't it?


Obviously this will be discussed in detail with my accountant but just wanted to ask if I'm on the right track from knowledgeable people on here incase I need to revisit the drawing board.

Jeremy535897

Just a couple of pointers.

Two SIPPs rather than one is not an issue for the tax free lump sum, so much as dividing income between spouses on retirement. Individual contributions are limited by the amount of earned income.

You might google Arctic Systems concerning different classes of share. Such arrangements may result in you being taxed on your wife's dividends.

Dazed_and_C0nfused

Dividends are not "tax free".

They will be taxed, albeit the first £2,000 will be at the dividend nil rate of 0%.

For most people this makes no difference to their income tax liability but the £2,000 is part of your adjusted net income so it can impact things like amount of Personal Allowance, High Income Child Benefit Charge and Married Couple's Allowance so can result in a larger tax liability despite the dividends themselves being taxed at 0%.

In niche circumstances they can also make you ineligible for Marriage Allowance, again despite the dividends being taxed at 0%.

billy2shots

Jeremy535897 said:

Just a couple of pointers.

Two SIPPs rather than one is not an issue for the tax free lump sum, so much as dividing income between spouses on retirement. Individual contributions are limited by the amount of earned income.

You might google Arctic Systems concerning different classes of share. Such arrangements may result in you being taxed on your wife's dividends.

It wasn't really the tax free lump sum I was thinking of, more the yearly tax free allowance taken twice (once from each pot ) rather than paying tax on everything over the allowance if all the money is taken from one pot. 

I will check our Arctic Systems, thanks.

billy2shots

Dazed_and_C0nfused said:

Dividends are not "tax free".

They will be taxed, albeit the first £2,000 will be at the dividend nil rate of 0%.

For most people this makes no difference to their income tax liability but the £2,000 is part of your adjusted net income so it can impact things like amount of Personal Allowance, High Income Child Benefit Charge and Married Couple's Allowance so can result in a larger tax liability despite the dividends themselves being taxed at 0%.

In niche circumstances they can also make you ineligible for Marriage Allowance, again despite the dividends being taxed at 0%.

Many thanks. Fully aware that dividends are not tax free but for all intents of purpose the £2000 will be tax free (all be it it's really £2000 at nil rate tax to be specific). 

This was the maximum m wife would take and it wouldn't affect anything at that level. This divided plus her PAYE with me plus her part time job would still keep her in the basic rate of tax. 

Her taking £2000 seems far more sensible than me taking an extra £2000 as that would have a knock on affect to certain things. 

waveneygnome

I won't comment on the dividend/tax issue - not my area of expertise.  Ask your accountant on the idea of different class of shares - some accountants do it,  others are more cautious.

One thing I would say is:  having another person as a Director (and consider adding them to the company bank account as signatory), should be looked at in the whole.  

Negatives:  you are giving access/shares/power/control to another person.  What if you leave your spouse/divorce/she leaves you.........horrible to think about, but it does happen.  Would you get a shareholder agreement drawn up (seems overkill, but there are horror stories out there).

Positives:  Gives you more tax planning options.  Shares the responsibility.  Better Disaster/Recovery options.

I've done similar to you, but my sole motivation was the Disaster/Recovery concern......if something should happen to me (covid/heart/stroke), by having my spouse all signed up would make tidying up arrangements so much easier.  Especially if you have staff to consider/run a sizable concern.  Not necessarily to take over the running of the business - just to make it easier for my spouse to orderly wind things down/sell the company.

Taxguru96

It seems like most of the points have already been covered, but you/your accountant should consider the settlement legislation in regards to the use of alphabet shares. Especially if you are a higher rate tax payer and she is at the basic rate.

MattMattMattUK

Forget the multiple classes of shares, based on your situation, HMRC will deem it tax evasion, so the best case scenario is you get away with it for a few years before having to pay the tax anyway. I would be seriously questioning the advice of any accountant who suggested that route.

Jeremy535897

MattMattMattUK said:

Forget the multiple classes of shares, based on your situation, HMRC will deem it tax evasion, so the best case scenario is you get away with it for a few years before having to pay the tax anyway. I would be seriously questioning the advice of any accountant who suggested that route.

It is not tax evasion, which is illegal. It isn't artificial tax avoidance either, as it has real and lasting consequences. It may fall foul of the settlements legislation, or the transactions in securities legislation, which is what the Arctic Systems case I mentioned earlier was about.

csgohan4

There are certain scenarios which it may not fall foul of the settlement legislation, but having different classes of shares is one that will not satisfy it. It must be equal strength of shares and equal rights to others and you would need to adjust the share ratio and care must taken in gifting shares to the partner to ensure it doesn't fall foul of the legislation.. 

Setting the partner to a director may help, but as above there are worst case scenarios to consider

Setting them as a  person of significant control would be reasonable without putting them as a director

The Artic case is by all means not all black and white, it is not a free ticket for couples to shift their tax liability to their non working or lower tax band partner and care must be taken to ensure they have covered all bases, from share classes, share ratios, ACTUAL work done E.T.C

Jeremy535897

I had hoped to avoid going into any more detail, but there appear to be several misunderstandings. Garnett v Jones (the Arctic Systems case) basically established that where one spouse (the donor spouse) that does all the important work, and is the key revenue generator, allows the other spouse (the donee spouse) to subscribe for shares at an undervalue, there is a settlement for tax purposes. Ordinarily, that would mean that the donor spouse would be taxed on dividends paid to the donee spouse, but for one important exclusion to the settlement legislation: an outright gift from one spouse to another is not a settlement, unless it is substantially a right to income. The shares in this case were the same, and so carried equal rights to both capital value and dividend income.

That is where creating a new class of share whose sole valuable attribute is the payment of a dividend (income) falls down, because such shares are substantially a right to income. When you get more creative with share rights, you also need to watch out for the transaction in securities legislation.