Structure of new company - spouse transfer

Making spouse shareholder for lower tax

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Hi,

I setting up a limited company with my colleague so both directors and 50/50 shareholding split. Straight forwards! 
 

However there is a cliff edge in the tax system where if i have any more income this tax year and the next few years (I have a full time job aswell) we will lose our free childcare hours so I will be much worse off.

 

I wanted to put myself and my colleague as directors but my colleague and husband as shareholders 50/50. 
 

I've had a look and legislation seems to state this is okay however I will be working for the company and will have no income whether that be salary or shares. Whereas my husband won't be but will receive dividends. Is this okay? 
 

I am a tax accountant so really don't want to be in any grey area with it but never come across this before. Also my colleague does need money out of the business as this is her only job.

 

maybe a salary for her then 50/50 between me and her and both pull dividends when I'm over the childcare situation? (Income would be great for us though in the meantime but we can live without it) 

 

thanks very much!! 

Replies (38)

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By FactChecker
25th Nov 2023 18:54

There are a lot of potential pitfalls here ... starting with what the Articles do or don't say about resolving decisions within that structure.

But sticking to the question posed:
"I've had a look and legislation seems to state this is okay however I will be working for the company and will have no income whether that be salary or shares. Whereas my husband won't be but will receive dividends. Is this okay?"
Yes - of course it's OK (in the sense that dividends follow shareholdings not work or roles).

TBH if you're "a tax accountant" then you presumably should be able to work out the tax impact on the varieties of scenario that you might consider - but it's the other aspects (from immediate operational control to eventual exit planning) on which you should maybe be seeking advice.

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Replying to FactChecker:
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By Daniellelh
25th Nov 2023 19:06

I’m not sure why tax accountant was in quotes as yes I am a very experienced tax accountant but in large multinational entities and internationally so small business tax in the UK isn’t my area of expertise hence asking of a forum which provides this information.

I’m also aware that dividends follow shareholdings not work. And i ask because after looking at all the different options this is clearly the most tax efficient.

I have seen case law where HMRC question this decision so I wanted to ensure it isn’t just legally acceptable but morally acceptable and any accountants that have set up this type of structure be able to confirm they have done it this way and all okay.

I am happy with how it will work but it’s the fact that I will be a director with no salary/ dividend (I know a director doesn’t have to be a shareholder) and how HMRC would view it.

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Replying to Daniellelh:
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By FactChecker
25th Nov 2023 20:34

FWIW the quote-marks were to indicate a direct extract from your post (unrelated to the modern habit of waving hands in the air as virtual punctuation).

I'm happy that you appear to be happy "with how it will work" ... and have no personal opinion regarding how HMRC might view it (since as I'm sure you know that can be close to apparently arbitrary in practice).
But if you could share the specific case (where you recall HMRC questioning this) then others may have more pertinent comments.

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Replying to FactChecker:
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By FactChecker
25th Nov 2023 20:47

Also, whilst childcare is a concept long in my past, if you are concerned that "we will lose our free childcare hours" if you receive additional income - but that this will not be affected by an increase in your husband's income - then presumably we are talking about your Adjusted Net Income taking you over the eligibility cap?

There are of course many ways in which to prevent that happening - such as making Gift Aid donations (which, since you mentioned the morally acceptable aspect, might seem appropriate when viewed alongside your earnings level)?

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Replying to FactChecker:
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By Daniellelh
25th Nov 2023 21:26

Yes agree with gift aid and I’m doing that and increasing pension and I give a lot to local charities personally so feel as if I’m morally okay.
I get a bonus the last day of the tax year which fluctuates which makes it hard to see what my ANI would be so I would rather air on the side of caution and not draw anything at all. It’s a cliff edge in the tax system that I would happily accept if i couldn’t appropriately plan my affairs and be compliant. Everyone who increases pension around this threshold is doing the same thing I’m just asking about a different type of income and the best way to structure it.

Not trying to do anything not okay and if I need to take the income absolutely fine hence why I was asking the question to legitimately understand if from people who have experience in this area so I can set up correct from the start.

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By Calculatorboy
25th Nov 2023 21:04

So there is no commercial basis to all this , it sounds like a sham to obtain benefits your are not entitled to ?

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Replying to Calculatorboy:
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By Daniellelh
25th Nov 2023 21:19

Well this page is exactly how I would thought it be come on to ask a legitimate question and not one actual helpful response. And not a sham at all I’m trying to work out the best way to set the business up in the most tax efficient manner as any person would rightfully do when undertaking something like this (hence why advisory accountants exist to advise clients on the best way to structure their affairs whilst being compliant) this is what I was seeking clarification on whether it is compliant or a grey area if it is a grey area then there is no way I would do it.

There is a cliff edge in the tax system where if my NAI was £4 more this year I would technically be thousands and thousands of pounds worse off.

And what is the commercial bias I would need to make this not a sham please explain as that is legitimately what I am asking!!! What is the best way to structure the business which HMRC would approve of, whilst taking into account the optimum way to draw money out of it!

So no not a sham asking a question if that’s okay??

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Replying to Daniellelh:
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By Calculatorboy
25th Nov 2023 22:45

Well I'm afraid that's the way the law is often drafted, you may think it's inequitable , but that's the way it is . If you are that well paid , pay for some professional advice from someone who has pi insurance

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Replying to Calculatorboy:
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By Daniellelh
26th Nov 2023 18:18

I absolutely will do if that’s the consensus hence why I was asking the question and if people came back and politely said these things can be complicated and without full information then a clear answer can’t be given (I’ve stated small business tax isn’t my area of expertise so there may of been a clear answer) then I would’ve but bringing my income into it to post a slightly rude answer isn’t very fair when I’ve asked a question.

I will happily take the money if need be but I would much prefer to keep it in the business but I don’t think that’s possible if we are both shareholders (A B shares etc could be an option) My business partner actually very much needs the money so I’m trying to plan right for her as I want her to get as much as possible out of it to help with her situation.

I would just like some examples similar where one partner needs the money and the other doesn’t and how it can be structured. The childcare hours are collateral and will lose them if need be but wanted to see if there was a way I could keep them whilst doing it all correctly which I think anyone would ask when I’m talking about over £10k lost even if it’s not possible it’s worth asking the question on it.

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Replying to Daniellelh:
paddle steamer
By DJKL
26th Nov 2023 20:47

Create two companies which hold the shares, one for you one for your colleague, shares held 50:50 between these two companies

Pay dividends from trading company to these companies. In your company pay out no dividends.

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Replying to Daniellelh:
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By FactChecker
25th Nov 2023 23:09

Honestly don't understand: "not one actual helpful response".

Your first/primary question was answered clearly ... and your second is incapable of being answered on a public forum where all the other pertinent factors (regarding personal & family finances/circumstances and the nature/objectives of the new business) are quite correctly unknown to your audience. You must know that!

Finally, as a tax professional, I would expect you to be aware that HMRC doesn't provide 'approval' (whatever some barristers may like to suggest).

If you are planning a new business then now is the time to get professional advice (not just on the immediate query regarding 'efficient short-term extraction' but covering every aspect - starting with whether a limited company is the most appropriate vehicle) ... and that requires more than the thoughts of anonymous people (like me) who are not allowed to give Advice and are not covered by PII.

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Replying to FactChecker:
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By Daniellelh
26th Nov 2023 18:22

That’s absolutely fine if the consensus is to get professional advice I will 100%. But it’s the digging at my motives in no way do I want to do anything dishonest. I would keep the money in the business for a year as do a lot of people when starting out to try and grow it but my partner can’t and needs money.

I just wanted examples of things like “put her on payroll” “different class shares” so I could investigate more that’s where my response of no helpful responses came from as I didn’t want full advice just a few different avenues I can look into just to see what different options there are as small business tax isn’t my area.

But if that isn’t possible genuine helpful responses saying professional advice is fine just without the undertone of a sham etc as that is not what I want to do.

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Replying to Daniellelh:
RLI
By lionofludesch
26th Nov 2023 17:45

Daniellelh wrote:

So no not a sham asking a question if that’s okay??

Sounds like a sham to me. You're working for no pay. Don't be surprised if various HMG departments challenge it. Claiming benefits to which you're not entitled is generally treated much more harshly than tax evasion.

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Replying to lionofludesch:
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By Daniellelh
26th Nov 2023 18:02

So forgive me if I have this wrong but if someone went to an accountant for advice and said look I’m going to trip over a tax threshold this year that would make me worse off should I not pull dividends from my company until next year the accountant would say you are doing tax evasion and you need to pull dividends? I definitely don’t think so the accountant would suggest staggering income to ensure tax efficiencies are utilised.

All I am asking is how I can defer my income until the next financial year (where I will be paying the highest rate tax on it and I will do that quite happily) whilst my business partner does get some this year as our situations are different. Or if I do need to pull it can it get in my husbands name if I put him as shareholder where he is still a higher earner but we just won’t trip over a threshold. Again I wanted just legitimate answers like “I’ve advised in the past to put the business partner on payroll so she can have earnings then keep dividends in the business until you can both pull them next year, there will be an NIC charge on that unless it it below the threshold etc etc etc” actual advice on it to understand the implications of certain actions as small business tax I don’t have as much experience. No sham here just trying to plan effectively if the business is successful which is what I believe everyone should do when planning a business. If I do need to structure it that way happy too just seeing what options are available that’s all!

And thousands of business owners work for little or no pay when starting out I’m happy to put mine all back into the business to grow it whereas my business partner does need it. I’m happy to put it back in and her take money as she’s in a different financial situation to myself so want to make sure she has income.

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Replying to Daniellelh:
RLI
By lionofludesch
26th Nov 2023 18:25

You're just hoping that you can find one person who agrees with you so that you can justify your scheme, aren't you?

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Replying to lionofludesch:
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By Daniellelh
26th Nov 2023 19:23

I genuinely don’t understand?? I have no scheme! I have no answers!

I’ve asked a way if I can keep my income below a certain level by not pulling it or having my husband as a shareholder. If no that’s perfectly fine, like 100% okay. But I’m just getting it’s a sham with no reasoning behind it and I want to legitimately understand the reason. Ie you have to have remuneration if you are a director for example I genuinely want to understand the implications of it and why/why not things can be done.

A scheme would suggest I’m trying to do something not compliant and I am 100% not I just really wanted to understand the best way to structure something

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By Matrix
25th Nov 2023 23:00

In my experience 50:50 structures between friends rarely end well so avoid the added complication of not owning the shares yourself. Own the company 50:50 and, for example, take an equivalent pension contribution to the friend’s salary if this does not count towards the limit for this benefit.

If you still want to go ahead with this JV and also claim, read all the legislation including checking out the anti-avoidance rules.

The answers are based on small practitioners’ experience in this area (as requested), so posters are actually trying to help.

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Replying to Matrix:
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By Daniellelh
26th Nov 2023 18:29

Thanks so much for your response and pension is a way I can lower it below the threshold so definitely an area I’m looking into.

Can I ask why you said 50/50 structures between friends don’t work out? In what way? The structure itself or the relationship between them? Is there a better structure you suggest?

I dont necessarily want to claim the hours but I don’t need the income which would mean I get the hours and would rather it stay in the business for a year whereas she does need it. If I pulled I would be paying nearly 40% dividend tax and lose the childcare which seems a bit crazy when I’d just prefer to keep it there to utilise in the business and to grow it.

I was thinking can I put her on payroll as an employee then next year we will have more staff so her hours will dramatically reduce and then take her off and we just get dividends?

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Replying to Daniellelh:
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By Matrix
26th Nov 2023 19:06

I would get bespoke advice on the structuring bearing in mind it is not just about tax.

Your question is not about small business tax planning but about benefit fraud - if you or your husband have reserves rolling up in a company while claiming you both earn <£100 then have you checked the anti-avoidance provisions?

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Replying to Matrix:
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By Daniellelh
26th Nov 2023 19:29

Ahh okay thanks so much I will look into that I didn’t realise that if I had money in a Ltd company that would be an issue as I thought by making it Ltd that would make it a seperate entity from myself until I drew and only then would it be classed as my income.

Excuse my ignorance on the topic but say the company I work for is Ltd and they have made profits of £5 million but the owners only drew £500k they would pay corp tax on the £5 million under the Ltd company and personal tax on the £500k. HMRC would not tax them personally on the business income.

Just like myself if I wanted to keep (a much smaller) amount in the business which will probably get used up in marketing to grow it by the end of the financial year so very little profit if my forecasting is right this year then HMRC could deem that as my personal income? Sorry like i say not my area so genuinely trying to understand it.

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Replying to Daniellelh:
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By Matrix
26th Nov 2023 19:38

I have no idea. Wouldn’t it be the DWP? There were anti avoidance provisions for tax credits when I looked at this about 10 years ago. It is maybe the benefit side which Lion, Hugo and DrinkingBoy are questioning as a sham, not the profit extraction methodology.

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Replying to Matrix:
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By Daniellelh
26th Nov 2023 19:50

I’ll have a look definitely thanks. Yes I understand how it read with regards to the childcare hours but I worked everything out to sit below (as would a lot of people) then my friend asked for help with this which I’m more than happy to oblige but just want to not take income from it until I know it’s established and profitable also pulling dividends is after tax so I want to make sure we are all good there before I do aswell so to me it makes sense to hold off for a variety of reasons, for both business sense and to ensure it will be successful and also personally.

Someone putting an extra 10k into a pension to stay below is okay (receiving a tax benefit and increasing wealth long term and still receiving childcare hours) but someone asking to defer income that I will then pay the highest tax rate on is deemed not okay is what confuses me a little but may be the way I asked it which I get :)

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By Tax Dragon
26th Nov 2023 08:15

You sound like someone who with a lot of knowledge and experience to contribute to this forum. As you never have contributed, it's a bit distasteful, to put it mildly, that you get all uppity when you don't immediately get a response to your own question that you deem acceptable.

You surely know enough to know that tax is situation-specific. You know the value of situation-specific advice (you presumably either give this to your employer as part of your role or your employer buys in specialist advice as needed).

It's not possible to give this kind of advice from the information available. Have you considered whether you might benefit from advice? I think you might.

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Replying to Tax Dragon:
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By Daniellelh
26th Nov 2023 19:36

Of course and I didn’t mean to get uppity it was just my motives were questioned when I am genuinely trying to understand something. Not to try and do anything that’s not okay but just work out the best way.

If actual advice can’t be given that’s more than okay but saying im trying to do a sham isn’t when all I care about in my role is compliance. If someone asked how to keep ANI below a certain level for reasons such a childcare they would get responses like increase pension or gift aid which ALOT of people do (which I had after and appreciated) but because I asked about it in a different way regarding structuring a business to ensure my partner can pull some money out I felt as if I got more personal unfair responses stating my income.

And I completely understand the specific nature of it I was more looking at general advice on setting up businesses and drawing income when someone needs it and someone doesn’t so say payroll the person for example. But I think advice is needed on this and will seek it to ensure all done completely correctly.

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By kaff
26th Nov 2023 16:48

“I have seen case law where HMRC question this decision so I wanted to ensure it isn’t just legally acceptable but morally acceptable”. As you'll know if you’ve read any case law on the subject, a tax tribunal or court will make decisions based on what the law says. The question of morality doesn’t come into it, and if HMRC were to imply that it had some bearing then you could presumably challenge that by reference to the case law decisions you've suggested you're already familiar with.

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By kaff
26th Nov 2023 16:48

“I have seen case law where HMRC question this decision so I wanted to ensure it isn’t just legally acceptable but morally acceptable”. As you'll know if you’ve read any case law on the subject, a tax tribunal or court will make decisions based on what the law says. The question of morality doesn’t come into it, and if HMRC were to imply that it had some bearing then you could presumably challenge that by reference to the case law decisions you've suggested you're already familiar with.

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By taxdigital
26th Nov 2023 18:20

If you wish to set up a company owned 50:50 by your colleague and their husband and you remain an unpaid director, on what basis you think HMRC will ever be able to attack you or the company for that matter? What case law are you talking about??

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By Bobbo
26th Nov 2023 18:35

Have you considered asking your colleague/business partner what sort of remuneration they would be looking for from the company?

If you're going to be running it 50/50 surely this is a joint decision.

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Replying to Bobbo:
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By Daniellelh
26th Nov 2023 19:43

Yep absolutely all been discussed and obviously can’t be set in stone because a start up has fluctuating incomes but we are sitting around an estimation of £5k a month each at the moment whilst we are building up that would leave enough in the company for growth. For me I don’t need that and would not pull for a year to really try to push the business but she needs an income.

I’m thinking can we payroll her a salary (albeit a low salary so say £12k within the personal allowance) so have her as an employee and both shareholders then just pull dividends next year she will be putting more time in so happy for her to take dividends and the low salary and me just take dividends. After doing some reading that seems like a good option?

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By FactChecker
26th Nov 2023 20:41

8 individuals have taken time out of their weekend to give you hints/responses/etc (but not 'advice', which isn't allowed on here and would be invidious in the circumstances of a public forum if you were to accept it as such).

There are an almost infinite number of permutations available to you (from type of vehicle to shareholder/employee contracts and planned end-games, before you even start to focus on either cash extraction or taxation impacts).

It's therefore a mug's game for anyone who wishes to continue commenting on each new permutation that you publish here - as whether or not it is a "good option" will depend on all the other (unknown to us) variables.

Not intended as a dig at you, but if you have the funds (and apparently an opportunity for a new business to cover more than £120k pa out of profits), then it behoves you to invest a little time & money on taking professional advice - where all aspects can be addressed together.

Good luck, but I'm out.

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paddle steamer
By DJKL
26th Nov 2023 20:51

Holdcos are the simple route re tax, divs paid up UK Co to UK Co, whether rolling up reserves in a non distributing holdco falls foul re the benefit rules I will leave to others versed with benefits etc.

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By Tax Dragon
26th Nov 2023 22:32

Anybody else noticed? 33 posts in now and counting, and a self-declared tax accountant of a multinational at the helm:
a) this thread contains not a single citation from statute, case law or even guidance;
b) we don't know whether the company will be trading, investment or what.

Out of interest (personal learning point here), what does "colleague" mean? I use it only when referring to people I work with. Yet OP is planning to set up with a colleague for whom this is (present tense?) the only job.

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Replying to Tax Dragon:
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By Daniellelh
26th Nov 2023 22:55

Okay wow I’m very sorry I didn’t include statute which I presumed other accountants would know. I am not experienced in this field so I’ve read basic knowledge and read the larger HMRC cases on it that have been published but didn’t know I needed to provide this information to not be questioned. I mean I can cite all my reasons and cases I’ve looked at if you so wish but as you know reading guidance and actually then understanding the interpretation of this is very important hence why I asked a forum to understand how others have interpreted it.

Maybe different in this field but in my field the actual interpretation can be quite different so hence why I asked the question (my field is international VAT and cross border transactions so different countries can vary massively from what is actually in their guidance hence why I wanted to know other accountants application of guidance to understand a little more)

I also didn’t know what the company does would affect the structure that I decide to take in any way? Nobody has asked this info so didn’t think it was pertinent to the question I was asking. It’s providing a service if you were indeed asking the question.

I’ve said she needs the income from the business. I don’t want to put all her personal details on a forum regarding her work/ personal situation that wouldn’t be right. The business isn’t trading yet so yes she is a colleague at the moment and will be a colleague in the future so I identified her as a colleague as that is what she currently is and will be in the new venture.

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Replying to Daniellelh:
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By Tax Dragon
26th Nov 2023 23:26

Daniellelh wrote:

Okay wow I’m very sorry I didn’t include statute which I presumed other accountants would know. I am not experienced in this field so I’ve read basic knowledge and read the larger HMRC cases on it that have been published but didn’t know I needed to provide this information to not be questioned. I mean I can cite all my reasons and cases I’ve looked at if you so wish but as you know reading guidance and actually then understanding the interpretation of this is very important hence why I asked a forum to understand how others have interpreted it.

I equally meant no-one had thrown any law at you in responding, when it would have been reasonable to have presumed you could 'take it'.

But it doesn't make sense to have "asked a forum to understand how others have interpreted it" without saying what "it" is.

Daniellelh wrote:

...my field is international VAT and cross border transactions...

Gets asked about all the time in here; my first point in my first comment seems correct.

Daniellelh wrote:

Nobody has asked this info so didn’t think it was pertinent to the question I was asking.

I don't speak for others; I haven't asked because I am not advising you. For me, this is a discussion forum, not a place to give or obtain advice.

If I was advising you, it would have been one of my questions.

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By Matrix
27th Nov 2023 02:05

Here is the citation for the notional income rules for tax credits: TCTM04803

I assume it is the concept of deprivation of income the others are referring to when they say the remuneration structure could be treated as a sham.

Sorry I don’t know the interaction of this concept with free childcare but it may help the OP determine if their approach is morally acceptable as required: https://revenuebenefits.org.uk/tax-credits/guidance/how-do-tax-credits-w...

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Replying to Matrix:
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By Daniellelh
27th Nov 2023 08:11

Thanks ever so much for this had a good read and I think my point which I don’t want the income to grow the company (I’m happy to keep it in there) but childcare hours are a result of it not the driving force may be applicable to this quote:

“So, a company director who waives a dividend in order to retain the profits within the company to aid future growth ought not to be caught by this provision. However, if the same director waived the dividend solely in order to increase their tax credit entitlement, the amount of the dividend may be treated as the director’s notional income.”

I think definitely I need to get advice as how can HMRC determine I have kept the money into grow it or done it for free childcare hours would be difficult for me to prove (unless I show marketing forecasts etc)

Thanks so much I appreciate the link and helped me clarify a couple of things!

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By Dib
27th Nov 2023 15:37

Just a thought. You say you will be working for the company but will have no income. How does that fit with national minimum wage. Not my field and I'm not sure if it will apply to your company. Perhaps best check.

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Replying to Dib:
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By Daniellelh
27th Nov 2023 16:04

Good point thanks for this I will check :)!
I’m thinking it best to just go 50/50 and pull and lose childcare and pay the highest rate of tax which is fine as I’d rather be cautious than to be in any bother!

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