Adding partner as a director

csgohan4

Jeremy535897 said:

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.

From my understanding the husband and wife team must be a 50/50 share split ratio, is this mandatory?

Would in theory say husband had 10% and non working wife had 90% fall under the legislation, assuming the share class were the same and gifted and had the same rights to income and both were directors. This would mean dividends would be split according and more in favour of the lower tax banded wife.

Jeremy535897

A 50/50 split is not mandatory. If there is just one class of shares, they carry all the rights to income, capital, and dividend rights, and so a gift of 1% or 99% does not fail the test of whether it is just a gift of income, or substantially a right to income. It is up to them how to divide the ownership. As has been noted earlier, there are other considerations beyond tax issues.

csgohan4

Jeremy535897 said:

A 50/50 split is not mandatory. If there is just one class of shares, they carry all the rights to income, capital, and dividend rights, and so a gift of 1% or 99% does not fail the test of whether it is just a gift of income, or substantially a right to income. It is up to them how to divide the ownership. As has been noted earlier, there are other considerations beyond tax issues.

Thanks for clarifying, I have come across accountants who are cautious and recommended 50/50 split to avoid issues with HMRC. 

But for future readers, care must be taken in allocation of shares and type and how much control the non earning spouse has in the company.  This is not a clear ticket for income shifting without risks and must have an audit trial and justification for income 

Interesting take on things from other learned members here, but clearly still a mine field and you do not want a hmrc investigation ever

Jeremy535897

csgohan4 said:

Jeremy535897 said:

A 50/50 split is not mandatory. If there is just one class of shares, they carry all the rights to income, capital, and dividend rights, and so a gift of 1% or 99% does not fail the test of whether it is just a gift of income, or substantially a right to income. It is up to them how to divide the ownership. As has been noted earlier, there are other considerations beyond tax issues.

Thanks for clarifying, I have come across accountants who are cautious and recommended 50/50 split to avoid issues with HMRC. 

But for future readers, care must be taken in allocation of shares and type and how much control the non earning spouse has in the company.  This is not a clear ticket for income shifting without risks and must have an audit trial and justification for income 

Interesting take on things from other learned members here, but clearly still a mine field and you do not want a hmrc investigation ever

It is the sort of area where professional advice must be taken before any action.

csgohan4

Jeremy535897 said:

csgohan4 said:

Jeremy535897 said:

A 50/50 split is not mandatory. If there is just one class of shares, they carry all the rights to income, capital, and dividend rights, and so a gift of 1% or 99% does not fail the test of whether it is just a gift of income, or substantially a right to income. It is up to them how to divide the ownership. As has been noted earlier, there are other considerations beyond tax issues.

Thanks for clarifying, I have come across accountants who are cautious and recommended 50/50 split to avoid issues with HMRC. 

But for future readers, care must be taken in allocation of shares and type and how much control the non earning spouse has in the company.  This is not a clear ticket for income shifting without risks and must have an audit trial and justification for income 

Interesting take on things from other learned members here, but clearly still a mine field and you do not want a hmrc investigation ever

It is the sort of area where professional advice must be taken before any action.

I think  accountants will generally not risk their own livelihoods and understandably go defensive on this matter, they will of course try and dissuade you from doing so at the very least, and if you don't want to, they will want it writing you are acting against their advice and indemnify them of your actions. 

The 50/50 split is an example I have encountered with  colleagues who's accountants have advised them, when other's have had much more favorable share split to the non earning spouse. 

Being a litigious culture, can't say I would blame the accountants being defensive on this

Jeremy535897

csgohan4 said:

Jeremy535897 said:

csgohan4 said:

Jeremy535897 said:

A 50/50 split is not mandatory. If there is just one class of shares, they carry all the rights to income, capital, and dividend rights, and so a gift of 1% or 99% does not fail the test of whether it is just a gift of income, or substantially a right to income. It is up to them how to divide the ownership. As has been noted earlier, there are other considerations beyond tax issues.

Thanks for clarifying, I have come across accountants who are cautious and recommended 50/50 split to avoid issues with HMRC. 

But for future readers, care must be taken in allocation of shares and type and how much control the non earning spouse has in the company.  This is not a clear ticket for income shifting without risks and must have an audit trial and justification for income 

Interesting take on things from other learned members here, but clearly still a mine field and you do not want a hmrc investigation ever

It is the sort of area where professional advice must be taken before any action.

I think  accountants will generally not risk their own livelihoods and understandably go defensive on this matter, they will of course try and dissuade you from doing so at the very least, and if you don't want to, they will want it writing you are acting against their advice and indemnify them of your actions. 

The 50/50 split is an example I have encountered with  colleagues who's accountants have advised them, when other's have had much more favorable share split to the non earning spouse. 

Being a litigious culture, can't say I would blame the accountants being defensive on this

I suspect the main concern is that HMRC promised to get legislation introduced back in 2008, but it never happened. They clearly don't like it, and who knows whether they might fancy their chances in the future?

csgohan4

Jeremy535897 said:

csgohan4 said:

Jeremy535897 said:

csgohan4 said:

Jeremy535897 said:

A 50/50 split is not mandatory. If there is just one class of shares, they carry all the rights to income, capital, and dividend rights, and so a gift of 1% or 99% does not fail the test of whether it is just a gift of income, or substantially a right to income. It is up to them how to divide the ownership. As has been noted earlier, there are other considerations beyond tax issues.

Thanks for clarifying, I have come across accountants who are cautious and recommended 50/50 split to avoid issues with HMRC. 

But for future readers, care must be taken in allocation of shares and type and how much control the non earning spouse has in the company.  This is not a clear ticket for income shifting without risks and must have an audit trial and justification for income 

Interesting take on things from other learned members here, but clearly still a mine field and you do not want a hmrc investigation ever

It is the sort of area where professional advice must be taken before any action.

I think  accountants will generally not risk their own livelihoods and understandably go defensive on this matter, they will of course try and dissuade you from doing so at the very least, and if you don't want to, they will want it writing you are acting against their advice and indemnify them of your actions. 

The 50/50 split is an example I have encountered with  colleagues who's accountants have advised them, when other's have had much more favorable share split to the non earning spouse. 

Being a litigious culture, can't say I would blame the accountants being defensive on this

I suspect the main concern is that HMRC promised to get legislation introduced back in 2008, but it never happened. They clearly don't like it, and who knows whether they might fancy their chances in the future?

Well HMRC has bigger fish to fry it seems, with the recent loan charge, renumeration scheme challenges and off shore Jersey Companies e.t.c.  

Still I am surprised the HMRC lost on the Artic case as it clearly is providing a loop hole for a husband and wife 2 person band free reign on income shifting. 

Jeremy535897

csgohan4 said:

Jeremy535897 said:

csgohan4 said:

Jeremy535897 said:

csgohan4 said:

Jeremy535897 said:

A 50/50 split is not mandatory. If there is just one class of shares, they carry all the rights to income, capital, and dividend rights, and so a gift of 1% or 99% does not fail the test of whether it is just a gift of income, or substantially a right to income. It is up to them how to divide the ownership. As has been noted earlier, there are other considerations beyond tax issues.

Thanks for clarifying, I have come across accountants who are cautious and recommended 50/50 split to avoid issues with HMRC. 

But for future readers, care must be taken in allocation of shares and type and how much control the non earning spouse has in the company.  This is not a clear ticket for income shifting without risks and must have an audit trial and justification for income 

Interesting take on things from other learned members here, but clearly still a mine field and you do not want a hmrc investigation ever

It is the sort of area where professional advice must be taken before any action.

I think  accountants will generally not risk their own livelihoods and understandably go defensive on this matter, they will of course try and dissuade you from doing so at the very least, and if you don't want to, they will want it writing you are acting against their advice and indemnify them of your actions. 

The 50/50 split is an example I have encountered with  colleagues who's accountants have advised them, when other's have had much more favorable share split to the non earning spouse. 

Being a litigious culture, can't say I would blame the accountants being defensive on this

I suspect the main concern is that HMRC promised to get legislation introduced back in 2008, but it never happened. They clearly don't like it, and who knows whether they might fancy their chances in the future?

Well HMRC has bigger fish to fry it seems, with the recent loan charge, renumeration scheme challenges and off shore Jersey Companies e.t.c.  

Still I am surprised the HMRC lost on the Artic case as it clearly is providing a loop hole for a husband and wife 2 person band free reign on income shifting. 

That only brings it into line with partnerships.

billy2shots

Some interesting comments thanks everyone.

I wanted to avoid the same classes of sharers IF we went down the splitting of shares route to aid flexibility i.e. both don't need to take a dividend.

If we forget dividends for a minute, the biggest plus of having my wife as a director was two fold. Business continuity as has been pointed out earlier if anything happened to me and a the pension rights of a director (up to £40k a year). 

I'm sure my accountant will reign in any wacky ideas I suggest.