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Adding house wife as a ltd company director

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    #21
    Originally posted by TheCyclingProgrammer View Post
    The settlements legislation DOES apply to spouses by default. That’s the whole point of the Arctic case and the spouse exemption. That’s why it’s very important to speak to an accountant and set things up correctly!

    Louisa was not wrong when she said you would need to be a director (any office holder really) or employee with at least 5% shares to qualify for ER. I don’t know why you are saying otherwise.

    Entrepreneurs' Relief - GOV.UK
    The Settlements legislation (also known as income shifting) does not apply to spouses, this is covered in section 626 of the Income Tax (Trading and Other Income) Act.

    The comment above regarding the 5% shares is not incorrect but it is misleading as it may lead to believe that a contractor limited company can simply qualify for the ER relief on this basis where it would actually be in most cases not possible for a contractor company to claim the relief even if the 5% shares requirement is satisfied. As mentioned in my post above, for a service company where perhaps the only income is consultancy fees with expenses at a minimal level, it may be difficult to justify that cash surplus is needed for trading operations so the ER cannot be applied to the final distribution if this was the case.

    Comment


      #22
      Originally posted by Chart Accountancy View Post
      As mentioned in my post above, for a service company where perhaps the only income is consultancy fees with expenses at a minimal level, it may be difficult to justify that cash surplus is needed for trading operations so the ER cannot be applied to the final distribution if this was the case.
      Whilst I accept there's some logic to the above, I've not seen any evidence of HMRC challenging ER claims on this point.

      My understanding is ER needs a company to count as a trading company. This has 4 separate 20% tests:
      - <20% of the assets being investment,
      - <20% of the income being from investment,
      - <20% of the expenses relating to investment,
      - <20% of the director's time relating to investment.
      To my mind virtually every solvent liquidation case could fail the first one. However they'd virtually all pass the other 3 with flying colours. Yes they'll have a hefty sum which may be in a deposit rather than current account, but costs relating to it are negligible, director probably doesn't spend more than 5-10 minutes a year looking at best interest rate tables, and with interest rates as they are, interest earned will almost certainly be trivial relative to the consultancy/similar profits. On that basis I would be amazed if HMRC tried to challenge this point.

      Comment


        #23
        Originally posted by Chart Accountancy View Post
        The Settlements legislation (also known as income shifting) does not apply to spouses, this is covered in section 626 of the Income Tax (Trading and Other Income) Act.
        This is wrong, or at best an over-simplication.

        The settlements legislation applies to spouses or civil partners of the settlor *by default* due to the wording of s624 of the aforementioned act (settlements where settlor retains an interest) *unless* the spouse exemption detailed under s626 applies. The spouse exemption only applies if certain conditions are met, which was the subject of the Arctic case. It does not apply automatically therefore it is simply wrong to say that the settlements legislation "does not apply to spouses" when it clearly can (and does in many circumstances).

        Primarily it needs to be an outright gift (defined as a gift not subject to any conditions and where the property or derived income can no longer be applicable for the benefit of or payable to the giver) AND is more than simply a right to income (i.e. the shares need to confer some other benefits like a right to capital on winding up and other shareholder rights).

        TSEM4205 - Trusts, Settlements and Estates Manual - HMRC internal manual - GOV.UK

        Since the Arctic case, the normal advice is that the shares must be ordinary shares carrying the same rights as that of the settlor and given with no strings attached (so no arrangements for the shares to be returned to the settlor at some future date).

        The comment above regarding the 5% shares is not incorrect but it is misleading as it may lead to believe that a contractor limited company can simply qualify for the ER relief on this basis where it would actually be in most cases not possible for a contractor company to claim the relief even if the 5% shares requirement is satisfied. As mentioned in my post above, for a service company where perhaps the only income is consultancy fees with expenses at a minimal level, it may be difficult to justify that cash surplus is needed for trading operations so the ER cannot be applied to the final distribution if this was the case.
        I'm sure Maslins will be along to question this - contractors close down their companies all the time and claim ER on the distribution of funds. The main requirement is that the company is a trading company and unless you've been actively investing your retained profits and are still trading I think it would be hard for HMRC to make an argument that you aren't a trading company.

        Comment


          #24
          Originally posted by TheCyclingProgrammer View Post
          This is wrong, or at best an over-simplication.

          The settlements legislation applies to spouses or civil partners of the settlor *by default* due to the wording of s624 of the aforementioned act (settlements where settlor retains an interest) *unless* the spouse exemption detailed under s626 applies. The spouse exemption only applies if certain conditions are met, which was the subject of the Arctic case. It does not apply automatically therefore it is simply wrong to say that the settlements legislation "does not apply to spouses" when it clearly can (and does in many circumstances).

          Primarily it needs to be an outright gift (defined as a gift not subject to any conditions and where the property or derived income can no longer be applicable for the benefit of or payable to the giver) AND is more than simply a right to income (i.e. the shares need to confer some other benefits like a right to capital on winding up and other shareholder rights).

          TSEM4205 - Trusts, Settlements and Estates Manual - HMRC internal manual - GOV.UK

          Since the Arctic case, the normal advice is that the shares must be ordinary shares carrying the same rights as that of the settlor and given with no strings attached (so no arrangements for the shares to be returned to the settlor at some future date).



          I'm sure Maslins will be along to question this - contractors close down their companies all the time and claim ER on the distribution of funds. The main requirement is that the company is a trading company and unless you've been actively investing your retained profits and are still trading I think it would be hard for HMRC to make an argument that you aren't a trading company.
          If the ER relief has been claimed without satisfying the qualifying conditions by many or without receiving advice if the relief was available, this would not make it more allowable to all that have claimed it incorrectly. The ER applies to qualifying business assets and the question would be if the buit up cash was needed for trading operations to satisfy the ER relief conditions.

          The Settlement Legislation would not apply to husband and wife with equal rights shares allocation and this is what the standard set up would be. If you are looking to allocate different rights to shares then this is outside of this discussion.

          Comment


            #25
            Originally posted by Chart Accountancy View Post
            The Settlement Legislation would not apply to husband and wife with equal rights shares allocation and this is what the standard set up would be. If you are looking to allocate different rights to shares then this is outside of this discussion.
            Yes, that’s exactly what I said in my post and is not what you said in your original post where you simply stated that “the settlements legislation does not apply to spouses” which is of course, rubbish.

            The point has been made all along is that the share splits need to be done correctly in order to avoid complications with the settlements legislation.

            There are other circumstances that could cause spouses to be caught by the settlements legislation - if conditions were attached to the gift of shares (eg you can have these shares if you agree to transfer them back to me at a later date, or only if you transfer any dividends back to me) or if dividend waivers were used.

            Comment


              #26
              I agree with TCP. It's misleading to say the settlements legislation doesn't apply when "technically" does. It's whether the spousal exemption applies that then does away with the application of settlement that is in question. To mirror Arctic Systems case, the company would need to have been set up as a brand new one and then shares split between them for there to be no issues. Gifting shares 6 years down the line when the company has value holds it's own risks as it can be argued that certain exemptions don't apply and therefore settlements legislation will. That's why most people here have indicated that the advice of the paid accountant should be sought. My opinion is that if you do it, do it with your eyes wide open and beware of the implications involved when gifting shares so many years down the line.

              If the OP is going to go ahead with it, then (as long as he trusts his "household manager") at least make her director too as others have confirmed.

              Comment


                #27
                Originally posted by Craig@Clarity View Post
                Gifting shares 6 years down the line when the company has value holds it's own risks as it can be argued that certain exemptions don't apply and therefore settlements legislation will. That's why most people here have indicated that the advice of the paid accountant should be sought. My opinion is that if you do it, do it with your eyes wide open and beware of the implications involved when gifting shares so many years down the line.

                If the OP is going to go ahead with it, then (as long as he trusts his "household manager") at least make her director too as others have confirmed.
                Arguably making her a director could help minimise those risks, as it is easier to argue that she is now getting involved in the company, and therefore should have a share. Have the Mrs be the one to sign off the accounts, do the VAT return, etc. That way you can claim she is now involved in ways she wasn't before, which at least gives a story to tell if challenged.

                Comment


                  #28
                  Originally posted by TheCyclingProgrammer View Post
                  Yes, that’s exactly what I said in my post and is not what you said in your original post where you simply stated that “the settlements legislation does not apply to spouses” which is of course, rubbish.

                  The point has been made all along is that the share splits need to be done correctly in order to avoid complications with the settlements legislation.

                  There are other circumstances that could cause spouses to be caught by the settlements legislation - if conditions were attached to the gift of shares (eg you can have these shares if you agree to transfer them back to me at a later date, or only if you transfer any dividends back to me) or if dividend waivers were used.
                  In practice, husband and wife would share ordinary shares (carrying full rights). Therefore, in order to confirm again what I have said in my original post with the addition of what you have referenced, as long as a spouse is given ordinary shares (carrying the full rights), any dividends paid on the shares should be treated as their income and the settlements legislation would not apply.

                  Comment


                    #29
                    Similar Question

                    Hi

                    I am starting a small company and set up the company as 50-50 between myself and my full time working wife (salary £57.5K) from 1 July 2019. I made her Director and the plan is to pay her dividend and may be some salary if she finally manages to help me (like she is doing now - managing admin work, website development and review, tools development and testing, pipeline management, diary management, etc).

                    Is there anything wrong in the thinking to pay her 50% dividend finally on top of her full time salary? would that be too much tax on her and if it is easier not to include her or partially include her?

                    Thanks in advance.

                    Accountant been sorted, will kick off from June 01, 2019 as trying to keep the cost as low as possible due to high mortgage and nursery/private school fees, Thanks

                    Comment


                      #30
                      Originally posted by TechRiskPartners View Post
                      Hi

                      I am starting a small company and set up the company as 50-50 between myself and my full time working wife (salary £57.5K) from 1 July 2019. I made her Director and the plan is to pay her dividend and may be some salary if she finally manages to help me (like she is doing now - managing admin work, website development and review, tools development and testing, pipeline management, diary management, etc).

                      Is there anything wrong in the thinking to pay her 50% dividend finally on top of her full time salary? would that be too much tax on her and if it is easier not to include her or partially include her?

                      Thanks in advance.

                      Accountant been sorted, will kick off from June 01, 2019 as trying to keep the cost as low as possible due to high mortgage and nursery/private school fees, Thanks
                      your wife can take £2k of dividends with no additional tax.
                      After that it's 32.5%

                      I'd be more inclined to give her a very minimal shareholding given the decent salary she has. Enough to use up the £2k, but nit much more.

                      You really should get your accountant to do this for you as there's more to it than this bare bone calculation. If you are struggling to pay another £85-100 for the most important part of your company lifetime (how you structure it) you've got bigger problems though (albeit just 1st world ones).


                      EDIT: if you've already set it up, and given her 50% before considering what the number should be, consider that the first lesson in not having an accountant.
                      See You Next Tuesday

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