The government has postponed new laws
that would prevent people reducing their
tax liability by shifting business income
to another person such as a nonworking
spouse or civil partner. This may provide
some valuable tax planning opportunities.
Although proposals were announced last
December, aimed at an April 2008 start, the
government decided further consultation
was needed. The difficulty is to frame
legislation that distinguishes between
‘acceptable’ business arrangements
and ‘income shifting’ to avoid tax,
while providing clarity and certainty for
businesses. It’s a tall order.
The delay gives businesses an extended
opportunity to save tax by paying dividends
up to 5 April 2009. Since losing the Arctic
Systems tax case in the House of Lords
last year, HM Revenue & Customs (HMRC)
has confirmed that where a non-working
spouse holds ordinary shares with rights to
the company’s capital, dividends can only
be taxed as the income of the spouse to
whom they are paid.
You can therefore save tax by paying
dividends in the current tax year up to the
limit of a non-working spouse’s basic rate
income tax threshold, ie up to £40,835.
Remember though that you have to count
as income the 10% tax credit as well as
the cash dividend itself.
You should also deduct any other income
your spouse might have, such as bank
interest. You can even give your spouse
shares shortly before paying the dividend,
provided the gift is unconditional and is of
ordinary shares with full voting rights.
Because the 10% tax credit is not
repayable, all or part of the personal
allowance of £6,035 is wasted if other
income is less than this amount. If your
spouse or partner does some work for
the business, you could increase the tax
saving by paying some salary as well. The
salary will be deductible from business
profits, provided it is a reasonable amount
for the work done.
We can advise you on how to make best
use of the current rules. There are some
restrictions on paying dividends, but we can
check whether they affect your company.
This will probably be your last chance to
save tax in this way, although further delays
cannot be ruled out. We can also consider
whether you should change the way your
business is set up for the future.
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