New company formation - dividend split husband/wife

[ContractorBanking]

Getting back to contracting after 'temporarily' moving to the dark side.

Spoke to my accountant, told him to set up new Ltd Co and enquired about the tax efficient way of shareholding (only recently married so never gave it much thought before).

He said he'd call back later and confirm once he's spoken to his tax colleague but suggested 'no more than 20% to the wife'.

I've started reading about div splits and the Arctic case and my understanding was, 50/50 husband/wife is perfectly fine, even when its only the husband that's the fee earner so long as a few criteria are met:

- shareholding has to be 50/50 and must be done on company formation
- only one class of share must exist and have voting and capital rights
- dividends must be paid to the individuals personal bank account
- money must not make it back to the fee earner

so, that said and with my limited knowledge of husband/wife share splitting, I think 50/50 is perfectly fine, especially as gifting between husband and wife is fine as long as the above is met.

I have a friend who is with SJD and he has a 60/40 split whilst another contractor at SJD has a 50/50 split.

What is everyone else on the panel here doing in terms of share splitting / gifting and anything else to be aware of?

[Kenny@MyAccountantFriend]

50/50 split would be fine if married due to spousal gift exemptions.

[psychocandy]

Sounds like its time for a new accountant. I've had this before and certain ones are completely clueless. Sounds like they they don't know and are blagging it. Think about - they tell you 20% are their arse is covered. You might be £1000s worse off a year but they dont care because they're covered. Way too cautious an approach.

Out of interest which accountant is it? Or is it a small local?
If its the latter, ask them their opinion on the arctic case etc. If they look blank its time to say bye bye.

Note, even if this is a local accountant who is IPSE registered beware of this. I met the biggest tosser I've ever met as an accountant who was IPSE registered. Its crap. All they do is pay IPSE to go on a one week course so they can put a badge on their website. If it all goes wrong IPSE aint interested in getting involved.

I'm with Nixon Williams. 50/50 is my split. Not a problem with this at all. All the things you say are correct including about Arctic.

Only advice NW ever gave me is dont mess around with the split too much once the company is set up. Its supposed to represent the company split and not meant as a tool for changing every year to save a few quid.

[psychocandy]

Getting back to contracting after 'temporarily' moving to the dark side.

Spoke to my accountant, told him to set up new Ltd Co and enquired about the tax efficient way of shareholding (only recently married so never gave it much thought before).

He said he'd call back later and confirm once he's spoken to his tax colleague but suggested 'no more than 20% to the wife'.

I've started reading about div splits and the Arctic case and my understanding was, 50/50 husband/wife is perfectly fine, even when its only the husband that's the fee earner so long as a few criteria are met:

- shareholding has to be 50/50 and must be done on company formation
- only one class of share must exist and have voting and capital rights
- dividends must be paid to the individuals personal bank account
- money must not make it back to the fee earner

so, that said and with my limited knowledge of husband/wife share splitting, I think 50/50 is perfectly fine, especially as gifting between husband and wife is fine as long as the above is met.

I have a friend who is with SJD and he has a 60/40 split whilst another contractor at SJD has a 50/50 split.

What is everyone else on the panel here doing in terms of share splitting / gifting and anything else to be aware of?

NW have advised me that it can go into same joint account. What I do is ensure the dividends are paid separately though. I.e. two payments, one in each name, but both ending up in the same account.

My understanding is that there is no issue with this. As long as there is demarcation that it is your partners money not yours in effect. If its going into a joint bank account then they have access to do as they wish with it which is the important thing. Of course, whether they choose to leave it there is up to them.

[TheCyclingProgrammer]

- shareholding has to be 50/50 and must be done on company formation

Doesn't have to be 50/50, there is no case law that has established an "acceptable" share split, though 50/50 is common, some give their spouse a lower share. Normally the right share split depends on your spouse's current tax position.

- only one class of share must exist and have voting and capital rights

The jury is out on different classes of shares - again no case law has been established to say that different classes of share are unacceptable AFAIK but the the most important thing, as you mention, is that all shares rank equally in terms of voting and capital rights (these are vital otherwise its a gift of income and the spouse exemption will not apply). The use of different share classes is something to be cautious about IMO.

- dividends must be paid to the individuals personal bank account

IMO yes, certainly to err on the side of caution.

- money must not make it back to the fee earner

Certainly not directly (e.g. transferring direct to your account on receipt). However there is no real answer to where the line is drawn. Are joint accounts OK? Nobody really knows the answer. Certainly your spouse may end up using her dividends to contribute towards shared household costs and bills (e.g. mortgage) which you certainly benefit from however this was not really explored in the Arctic case (it seems reasonable to assume that if an indirect shared benefit such as this was enough for the settlements legislation to bite then HMRC would have explored this line of attack but they did not).

There's a key point to the "spouse exemption" which is often overlooked which is that the settlor (i.e. you) must still not retain any benefit in the gifted shares or any derived income. So gifting shares to your wife with strings attached (e.g. that she must give them back to you in the future) would still be caught as you would be retaining an interest in the shares. The wording of the legislation makes it potentially very broad. This is why accountants are cautious about things like paying into joint accounts.

What is everyone else on the panel here doing in terms of share splitting / gifting and anything else to be aware of?

My wife has 25% of our business. This is a level I'm personally comfortable with and allows me to maximise my tax free and basic rate allowances whilst still retaining a reasonable level of profit in the company each year (my "warchest").

If we had a 50/50 split then I would obviously have to distribute more profits each year than I do currently, thus increasing my "break even" turnover (i.e. the amount I need to cover our regular annual dividend levels without dipping into retained profit) so this is something to consider. Obviously the aim is to try and exceed this level of profit so you start to build up some retained reserves. I'm happier with slightly less in our pockets each year whilst building up a good level of retained profit to cover the unexpected (I like to have enough to cover at least 12 months of dividends).

[ContractorBanking]

NW have advised me that it can go into same joint account. What I do is ensure the dividends are paid separately though. I.e. two payments, one in each name, but both ending up in the same account.

My understanding is that there is no issue with this. As long as there is demarcation that it is your partners money not yours in effect. If its going into a joint bank account then they have access to do as they wish with it which is the important thing. Of course, whether they choose to leave it there is up to them.

Thanks psychocandy.

You're right, divis can go into a joint account, I just added separate accounts as we have both (individual and joint accounts), and that is just me erring on the side of caution.

He's a local accountant, and certainly knows his general accounting, but certainly not a 'contractor accountant' as such.

I used him before, several years ago when my original accountant migrated to Oz. Very friendly, approachable and has been doing this for over 30 years. I can meet him whenever I want, always offers advise is very organised. To be fair, he did say he would get back to me once he's spoken to his specialist so lets see what he sees.

Certainly encouraged by what I've read about 50/50 shareholding and you guys have confirmed my limited knowledge in this area.

[psychocandy]

Thanks psychocandy.

You're right, divis can go into a joint account, I just added separate accounts as we have both (individual and joint accounts), and that is just me erring on the side of caution.

He's a local accountant, and certainly knows his general accounting, but certainly not a 'contractor accountant' as such.

I used him before, several years ago when my original accountant migrated to Oz. Very friendly, approachable and has been doing this for over 30 years. I can meet him whenever I want, always offers advise is very organised. To be fair, he did say he would get back to me once he's spoken to his specialist so lets see what he sees.

Certainly encouraged by what I've read about 50/50 shareholding and you guys have confirmed my limited knowledge in this area.

Be very wary though. This is what you need. I've been burned a few times with accountants like this who dont have a clue. I've noticed accountants wont admit they know nothing about IT contracting and will gladly take your money.

A story from years ago when IR35 was first on the scene. Was looking for new accountant got recommended a local one. Went to see him to have a chat. I mentioned IR35 yes no problem we can do all you want.
Week later sent me a bill for £500 with a description "Time spend researching IR35". I told him to do one....

Point being, you need an accountant who already has the knowledge about IT contracting, not one who, who has no idea and its winging it. You pay good money for this.

How would a client behave if they were paying you hundreds of pounds a day and you turned up first day with a pile of manuals, started reading, and admitted you didnt know too much about what you were doing?

[northernladuk]

But 50/50 is a piss take and I can't believe they haven't picked up on this yet... So they lost the Arctic case but as it appears to be the defacto standard now I can't believe it will be long before it's picked on. If they have enough time to pick on T&S and slap a divi tax on us then addressing 50/50 splits is a pretty quick and easy win.

The Arctic case was won on the basis that a wife should have a share in the money earned by the husbands business which I totally agree with. Withdrawing the same amount as the husband I don't.

I'd be more than happy if the govt dropped the T&S issue and focussed on 50/50 splits IMO. 20/80 or up to 40/60 would be more reflective of the amount of effort to support the husband compared to the income from him as the main fee earner so is more common sense.

Harsh and I am sure the people happily running 50/50 systems won't agree but I'd rather they picked on stuff like this rather than the core elements of what we do. You can continue to contract dropping to 20/80 splits. It's a lot more difficult with T&S and divi tax.

[psychocandy]

But 50/50 is a piss take and I can't believe they haven't picked up on this yet... So they lost the Arctic case but as it appears to be the defacto standard now I can't believe it will be long before it's picked on. If they have enough time to pick on T&S and slap a divi tax on us then addressing 50/50 splits is a pretty quick and easy win.

The Arctic case was won on the basis that a wife should have a share in the money earned by the husbands business which I totally agree with. Withdrawing the same amount as the husband I don't.

I'd be more than happy if the govt dropped the T&S issue and focussed on 50/50 splits IMO. 20/80 or up to 40/60 would be more reflective of the amount of effort to support the husband compared to the income from him as the main fee earner so is more common sense.

Harsh and I am sure the people happily running 50/50 systems won't agree but I'd rather they picked on stuff like this rather than the core elements of what we do. You can continue to contract dropping to 20/80 splits. It's a lot more difficult with T&S and divi tax.

But of course this is your personal opinion....

As we're always telling newbies on this forum, ask your accountant. I did as I'm sure others have. Answer I got back is "Its fine to do 50/50".

[ContractorBanking]

I've just been asking some of my other contractor mates who are married and 4 of the 5 have a 50/50 split because their accountants have said its fine (and they're all the big name accountants, Nixon, SJD, etc) and one has a 60/40 split (local firm of accountants)

What I'm struggling with is where does it state the level of shareholding should be x/y ratio rather than 50/50? Where do you draw the line? Is there something in legislation or is it merely a figure we think is a "red flag".

And for those that have a split, what are your ratios?