Contractors’ Questions: How to protect cash in a limited company?

Contractor’s Question: What is the best wayto protect the assets (cash) in a limited company against a future unwanted event, such as a divorce? Would it be possible to make a trusted third party, such as my father, the 100% shareholder of my limited company, and possibly the sole director too? I would then become an employee of the company, with a paid salary and possibly dividends, but would keep the bulk of profits in the company.

In the event where a divorce court needs to tally up assets and income, would the court be able to make orders against the profits held in the company, even though they are not legally mine? After all, in the above set-up, I would be merely an employee in someone else's company.

Lastly, what about timing? I fear that if this set-up was implemented at the onset of proceedings, it might be seen as tax avoidance by a judge. But what if this were done a year or two before any court action? Would this still likely be construed as the company shareholder being an 'intervenor?' Or is there an easier way to protect the cash in my company? Perhaps I could give it away, even as a ‘gift’?

Expert’s Answer: This is an interesting question and, although quite specific to your individual circumstances, is one which crops up from time to time among limited company contractors.

In theory, if you work for a company in which you have no shares, then in the event of a divorce, your employer’s assets would not be considered as part of your assets and therefore, they would not be included in a settlement. However, personal earnings (and outgoings) would be considered in terms of establishing spousal or child maintenance.

I can see a couple of issues here that may cause a few problems, even if you have 100% trust in the third party:

  1. You could be seen as a "shadow director" of the company, and therefore in a position to influence how the company behaves and how it rewards it's employees. You could then be assessed on your earning potential, rather than your actual earnings.
  2. You may be deemed to be the "beneficial owner" of the shares held by the third party. This could result in the value of the company’s shares, including assets held by the company, being taken into consideration.
  3. You could also have difficulty in proving the commerciality of the arrangement to a bank. This would complicate opening and operating a bank account, not to mention effectively handing over the control of the company’s finances to another person.

In my opinion, the complications in running your own company through a third party would outweigh the potential advantages of such an arrangement. You should also be aware that there is no time limit on the courts unravelling a situation where you put assets out of the reach of current or even future creditors and as you mention, a legal intervention could be made through the court.

In order to protect the cash, a limited company cannot just gift money to somebody without there being a tax implication on the party receiving the gift. You will probably find that the best way of protecting the cash is to spend it!

As ever, I would advise discussing your personal circumstances with a professional tax advisor before entering into any transaction.

The expert was Martin Mckechnie, Client Services Director at The Low Tax Group, a chartered management accountancy specialist.

Friday 24th June 2011