Changing share structure of a Ltd Company

[alloy36]

Hi,

I was contracting a few years ago via a limited company of which me and my mrs were equal shareholder but then took up a permie well paid job.

I have an opportunity for some part time contracting work which I can do under my company. My question is for tax efficiency is it legal for me to change the share ownership of my limited company to my mrs so all dividends can be withdrawn under her name and utilise her tax allowance?

She is looking after our kids so not working at the moment. If I was to withdraw the dividends equally in accordance with out current shareholding, I would get stung with the dividend tax as I am a higher rate tax payer. The take-home then may not justify the extra work into doing this sideline consultancy work.

Any help appreciated.

Thanks

[Jockman]

You can keep the structure the same (50:50?) but reclassify the shares.

[Eric Mc]

HMRC is not keen on such an arrangement for small owner managed companies i.e. one individual generates all the income but an entirely different individual claims all the income is theirs.

HOWEVER, they have not been terribly successful in challenging such "income splitting" arrangements, most famously in what is known as the "Arctic Systems" case.

But it is potentially a risky ploy.

[akirk]

Jockman said:

You can keep the structure the same (50:50?) but reclassify the shares.

This - 1 share each - Ordinary share x 1 / A-Ordinary share x 1
= 50:50
but you can set dividend rate per class...

but as above - make sure that you aren't causing any upset - in theory you need to not look as though you are scamming the tax system!

[alloy36]

Thanks everyone.

hmmm, the legend known as Eric MC does not sound keen - more research needed me thinks

The sad thing is this could make the difference between me taking up this opportunity or not. At time it seems like trying to work hard is not really worth it. I'm sure with all the taxation and loss of child benefit etc, there must be some cases where it is better to work less!! How can that be right

[akirk]

alloy36 said:

Thanks everyone.

hmmm, the legend known as Eric MC does not sound keen - more research needed me thinks

The sad thing is this could make the difference between me taking up this opportunity or not. At time it seems like trying to work hard is not really worth it. I'm sure with all the taxation and loss of child benefit etc, there must be some cases where it is better to work less!! How can that be right

There are lots of cases where it is better to work less - that is often why people remain on benefits...

all you need, for it to be legal is for your wife to be working in the company...

[Jockman]

akirk said:

alloy36 said:

Thanks everyone.

hmmm, the legend known as Eric MC does not sound keen - more research needed me thinks

The sad thing is this could make the difference between me taking up this opportunity or not. At time it seems like trying to work hard is not really worth it. I'm sure with all the taxation and loss of child benefit etc, there must be some cases where it is better to work less!! How can that be right

There are lots of cases where it is better to work less - that is often why people remain on benefits...

all you need, for it to be legal is for your wife to be working in the company...

You don't even need that. My wife is an Office Holder only. She has class E shares, I have class B shares. Very common set up, though the share holding should not be frivolous.

[Mandat]

Why not employ the wife on PAYE and pay her up to the tax allowance limit?

[Jockman]

Mandat said:

Why not employ the wife on PAYE and pay her up to the tax allowance limit?

That would not be efficient.

[Mandat]

Jockman said:

That would not be efficient.

But presumably more efficient than the OP bearing the full tax burden, while the wife's personal allowance remains unused.

I haven't crunched the numbers, so don't know the detailed sums involved.

[Jockman]

Mandat said:

But presumably more efficient than the OP bearing the full tax burden, while the wife's personal allowance remains unused.

I haven't crunched the numbers, so don't know the detailed sums involved.

Yes certainly more efficient than the current set up.

[Alpinestars]

What you’re suggesting should be fine.

The usual attack is via the settlements legislation, where HMRC considers you (in this case) have set up a settlement in favour of your Mrs. There’s an exemption to the settlements point where an asset is gifted, and the rights the asset gives are not purely income rights. Therefore if you gift ordinary shares in the company which not only entitle the holder to income, but also to capital and voting rights etc, it’s fine.

https://www.legislation.gov.uk/ukpga/2005/5/sectio...

[anonymous-user]

You could do the work and leave the money in the company for a while

Pay your Mrs on PAYE up to the tax free allowance for however many years it takes to use up the money for the important work she will do for the company in that time period

[Eric Mc]

JPJPJP said:

You could do the work and leave the money in the company for a while

Pay your Mrs on PAYE up to the tax free allowance for however many years it takes to use up the money for the important work she will do for the company in that time period

Even better, pay her up to the NI limits so you don't have to calculate and deduct NI.

HOWEVER, you need to be sure you are aware of the following -

Auto enrolment pensions
National Minimum Wage

[Alpinestars]

Gift the shares. Far easier.

[gazza5]

Nothing wrong with changing the shareholding.

Although difficult to do with only 2 shares in issue (assumed one each).

Paying the wife through PAYE isn't a bad shout - not sure on the value of the extra work to put through the company.

You could earn the money and put it in to a pension - therefore using your pension allowance, how long will the work take you - could your wife "do the book keeping / invoices etc" - therefore earning a wage at £10 per hour - not worthwhile if it will only take 2 hours a month.

Depends on your appetite for risk - you could make your wife a director, you resign, therefore with only 1 director you can be exempt from the pension rules, this you can then pay her the salary of £8060 (depending on income) and that gets away from minimum wage rules too (don't apply to directors) - if any money left over pay her a dividend (£2k tax free above that 7.5%).

[Alpinestars]

Not difficult to increase the share capital and then gift the right proportion.

[Jockman]

Alpinestars said:

Gift the shares. Far easier.

Exactly what we did.

[V8RAW]

I've had shares reclassified in one of my businesses so that one of two shareholders can be paid a dividend but not the other.

Had no issues from HMRC so far.

[Eric Mc]

V8RAW said:

I've had shares reclassified in one of my businesses so that one of two shareholders can be paid a dividend but not the other.

Had no issues from HMRC so far.

HMRC can query such arrangements and there is a risk that they could step in and block it. However, HMRC are notoriously lax when it comes to applying their own rules so you may be lucky and never hear a peep from them.

It's a risk.