Company Formation

[duke748]

Just about to form a ltd and jump into the contracting world.

Mrs Duke doesn't work so I want to maximise earnings and her tax status.

Whats the best way for this?

Should she be both Secretary and Director ? - I've had a look on here regarding Artic and S660a and all the ensuing problems, but couldn't ascertain the best way forward on this as it was all rather contradictory

[DaveB]

The classic route is to make her co. sec. and a minority shareholder. Pay Dividends in proportion to the number of shares owned.

As far as pukka tax advice goes, talk to an accountant.

[malvolio]

To be fair, S660a is contradictory, partly becuase the case is still under appeal (thinks - it must be due to be heard fairly soon). Ignoring the political nonsense of resurrecting 50 year-old legislation and re-applying it to a totally different case for the moment, Hector claims that Mrs Jones' income from the company did not equate to the work she put in, hence the money was all actually Mr Jones' and should be taxed accordingly. This goes against common sense, the will of Parliament and the whole priniciple of independent taxation, but the final ruling is yet to be received.

If the case is lost (doubtful but possible), then Hector will re-examine every potential case and go after the back tax (about £3bn at one estimate, so worth doing and sod the damage it will cause). It would be as well to hang on for a few months and see what happens; you can always sell her a couple of shares later on.

[oraclesmith]

Wifey as company sec and shareholder.

A word of warning on share allocation. At the beginning, the shares are only worth a nominal amount (say a £1) because the company is not trading. However, if you start raking in good money then the shares are correspondingly worth more. If you, for example, regularly pay a £10k dividend per share, then you will have problems allocating more shares to shareholders because they will need to pay the going rate for them - as if they were sold to outsiders. I looked into this when I needed to up my own share allocation and I couldn't find a way round it without actually paying something substantial for the shares or paying a lot of tax. It got sorted in the end because S660A works in my favour so I left the allocation alone, but you would do well to seek professional advice about share allocation because you need to get it right from the beginning.

Another factor which my lawyer came up with is that if your wife is a shareholder, even a minority one, then there will be at least a surviving interest in the firm should you snuff it. He apparently thought that it would make things easier.

[malvolio]

All very true, except the Arctic appeal verdict will be handed down this year, in which time frame the OP's company probably won't have accrued a lot of earned value. You can always fund the purchase via a company loan anyway, provided it's returned in good time.

[triboix]

Wifey as company sec and shareholder.

A word of warning on share allocation. At the beginning, the shares are only worth a nominal amount (say a £1) because the company is not trading. However, if you start raking in good money then the shares are correspondingly worth more. If you, for example, regularly pay a £10k dividend per share, then you will have problems allocating more shares to shareholders because they will need to pay the going rate for them - as if they were sold to outsiders. I looked into this when I needed to up my own share allocation and I couldn't find a way round it without actually paying something substantial for the shares or paying a lot of tax. It got sorted in the end because S660A works in my favour so I left the allocation alone, but you would do well to seek professional advice about share allocation because you need to get it right from the beginning.

Another factor which my lawyer came up with is that if your wife is a shareholder, even a minority one, then there will be at least a surviving interest in the firm should you snuff it. He apparently thought that it would make things easier.

Hi,

I think you can reshuffle your company shares by first paying out a lot of dividends. Then only a few pounds will remain in the company's bank account, along with other capital stuff you have (computers, etc.) The company shares will be valued much less then. This works at least technically.

I also thought that there is an allowance for husband/wife gifts; can't you use it to transfer some shares?

[oraclesmith]

Hi,

I think you can reshuffle your company shares by first paying out a lot of dividends. Then only a few pounds will remain in the company's bank account, along with other capital stuff you have (computers, etc.) The company shares will be valued much less then. This works at least technically.

But the market value is based on past performance. For example if my £1 shares pay a divi of £10k each for several years, then on the open market they would be worth probably around £100k apiece or more to an independent investor, providing the trading circumstances of the company haven't changed - ie. not going under, same income streams etc. It would be difficult to argue this one, methinks.

I also thought that there is an allowance for husband/wife gifts; can't you use it to transfer some shares?

Transfer yes, but what I've been considering is issuing myself more shares as a Director. ie. issuing the remaining 98 shares retained by the company I control. These would probably be regarded as 'by reason of employment' and reportable on Form 42.

[tim123]

To be fair, S660a is contradictory, partly becuase the case is still under appeal (thinks - it must be due to be heard fairly soon). Ignoring the political nonsense of resurrecting 50 year-old legislation and re-applying it to a totally different case for the moment, Hector claims that Mrs Jones' income from the company did not equate to the work she put in, hence the money was all actually Mr Jones' and should be taxed accordingly. This goes against common sense,

I disagree (and so do many professionals). The revenue's view is the common sense one. That is why they have got as far as they have.

But common sense is irrelevent in law, that is why the Jones are winning at the moment and ought to win in the end.

tim

[triboix]

But the market value is based on past performance. For example if my £1 shares pay a divi of £10k each for several years, then on the open market they would be worth probably around £100k apiece or more to an independent investor, providing the trading circumstances of the company haven't changed - ie. not going under, same income streams etc. It would be difficult to argue this one, methinks.

Well, this argument makes sense!

Transfer yes, but what I've been considering is issuing myself more shares as a Director. ie. issuing the remaining 98 shares retained by the company I control. These would probably be regarded as 'by reason of employment' and reportable on Form 42.

If you want to issue new shares, I guess indeed there are not too much tax saving tricks!

[malvolio]

I disagree (and so do many professionals). The revenue's view is the common sense one. That is why they have got as far as they have.

You are kidding, of course. Quite apart from the minor details:

a) that Diana Jones did real work for Arctic over the years and paid for her shares out of her own pocket when the company was set up,

b) that S660a is aimed at shares that are substantially a right to income, which ordinary shares are not,

c) that it is the clear will of Parliament when independent taxation of spouses was set up that married couples could and should share their personal allowances to minimise their tax bill,

d) that the law only appllies to marries couples and not long term partners, siblings or any other pairing and is thus totally discriminatory, and

e) the High Court judges who handed down the last ruling were unanimously adamant that Hector was wrong and Arctic was right....

You frequently talk bollocks, young Tim, this time you have excelled yourself. The case is being prolonged for political reasons, not legal ones. The potential take is too high for Gordon to ignore, whether it is moral or justifiable.