Optimal Split for Spouse shareholding

[sher]

I am in the process of setting up a new limited company. I am planning to set my wife (who is not working) as a shareholder.

I have briefly browsed various threads and have read the Arctic case summary. I understand that the most common practice is 50:50 ordinary share split with spouse.

I have already earned some salary for this tax year in my current full-time employment (which I am leaving to start contracting through limited company). In my case, it appears that the most optimal way to structure my limited company business would be to split the shares between me (as Director & shareholder) and my wife (as other shareholder) in 1:9 ratio. My salary income to date if added with dividend (split at 50:50) will push me into the higher tax rate bracket, thus leading to higher tax rate on dividend income (which sort of defeats the tax efficiency). I am better off passing as much dividend income to my wife (under the tax threshold).

Is 1:9 shareholding safely justifiable (to HMRC), given that I will be the director who would be providing the services? If not, what share distribution can be justified readily - 25:75, 30:70, 40:60?

Would you absolutely recommend not skewing the split more than 50:50 in favour of my wife?

Thanks

[dynamicsaxcontractor]

I am in the process of setting up a new limited company. I am planning to set my wife (who is not working) as a shareholder.

I have briefly browsed various threads and have read the Arctic case summary. I understand that the most common practice is 50:50 ordinary share split with spouse.

I have already earned some salary for this tax year in my current full-time employment (which I am leaving to start contracting through limited company). In my case, it appears that the most optimal way to structure my limited company business would be to split the shares between me (as Director & shareholder) and my wife (as other shareholder) in 1:9 ratio. My salary income to date if added with dividend (split at 50:50) will push me into the higher tax rate bracket, thus leading to higher tax rate on dividend income (which sort of defeats the tax efficiency). I am better off passing as much dividend income to my wife (under the tax threshold).

Is 1:9 shareholding safely justifiable (to HMRC), given that I will be the director who would be providing the services? If not, what share distribution can be justified readily - 25:75, 30:70, 40:60?

Would you absolutely recommend not skewing the split more than 50:50 in favour of my wife?

Thanks

50:50 from the start, would look really dodgy giving her more than you and then change it come April.

[Greg@CapitalCity]

Yep, I think ignore what will happen for the rest of this tax year and take a longer term view. You will probably find in the long term that a 50:50 split (or thereabouts) will work out best, provided your spouse is not working. If you decide to go ahead with a 50/50 split, AND if you can manage it from a personal cash flow perspective, see if you can delay paying any dividends until after 05 April 2013. Then you avoid the higher rate tax issue for 2012/13.

[northernladuk]

In fact to push this one further some accountants on here would suggest skewing it in your favour to attempt to recognise the relationship or something like that. 60/40 75/25 etc. Others would not recommend doing it at all.

You have to forget this year. You cannot pick one shareholding now and change next year. THat is a red rag to a bull. Set it up and stick to it. If your wife's circumstances will chage in the next 12 months or so think hard about doing this at all.

You will be contracting for many years so taking a small hit on tax in one year isn't going to be the end of your world.

First things first though... Get yourself an accountant and speak to them. Don't set your business up based on blind faith on a load of strangers on an internet forum.

[Jessica@WhiteFieldTax]

I tend to agree with Greg - I'm always comfortable with 50:50, but get nervous if its skewed any further away from the person generating income.

One way of OP using spousal allowances this year but without incurring personal tax himself, is a dividend waiver. They work, but getting the paperwork and detail correct is essential.

[captainham]

One way of OP using spousal allowances this year but without incurring personal tax himself, is a dividend waiver. They work, but getting the paperwork and detail correct is essential.

I thought waivers were a bit of a no-no, as they tend to be like a red flag to a bull* and open to challenge from HMRC, particularly when talking about income splitting between fee-earning director and spouse?

*Edit: So I've heard, I should say....

[eek]

50:50 from the start and don't change it down the line. As you wife will earn more down the line you probably should be 100% to you but thats your personal decision.

No dividends until April 6th unless you really need to. Director loans can fill the gap if need be.

And don't try to be clever with dividend waivers or multiple shareholder classes. Being clever is a red rag to the HMRC bull if they take a dislike to you.

[sher]

Many thanks for all your responses. It appears that playing safe is the best recommended option.

I accidentally duplicated the posts here:
http://forums.contractoruk.com/accou...it-spouse.html

Apologies!

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Currently I can provide evidence for my wife's involvement in setting up the company (i.e. doing the research on set up etc.) and helping me with admin duties. At latter point of time when she gets back to work (as locum doctor), she might be earning more in contract than me. From the latter point of view (which is a long-term scenario), is it justified to give her higher share percentage? More pertinently, can husband and wife contract for different services through the same limited company?

[northernladuk]

Many thanks for all your responses. It appears that playing safe is the best recommended option.

I accidentally duplicated the posts here:
http://forums.contractoruk.com/accou...it-spouse.html

Apologies!

---

Currently I can provide evidence for my wife's involvement in setting up the company (i.e. doing the research on set up etc.) and helping me with admin duties. At latter point of time when she gets back to work (as locum doctor), she might be earning more in contract than me. From the latter point of view (which is a long-term scenario), is it justified to give her higher share percentage? More pertinently, can husband and wife contract for different services through the same limited company?

Am sorry to say this again but you seriously need to get an accountant. You may be able to justify to yourself paying your wife thousands for research in setting up a company (hour max) admin duties (close to nil) but HMRC will not. You have to be very pragmatic if you are going to do this.

It is a red rag to be changing your shareholding close to setting it up so from what I have read in threads (and my own misguided opinion) you should set it up now how you want to run it for say the next 2 to 3 years. You do not want to be changing shareholding within a year and every time either of you is out of work. Yes the can but the general consensus I think is to have her set up her own company. The hassle of working out who earns what and who is in contract who is out of contract just isn't worth it. You will also have to change the designated work of your company if her income to the business is greater. If you were both in IT maybe but as she isn't get her to set her own company up. She has done the research so it will be a doddle.

Get an accountant and speak to them. There is tons you are probably missing and they will be able to save you more than you know currently. The will also set your company up so saving your wife all that extra work of researching it as well.

[northernladuk]

... Oh and your wife doesn't have to justify anything to own shares in a company, only if she is working for the company. I hold shares in companies and I don't life a finger for them.