A Quick Guide To Husband and Wife Businesses

At McDade Roberts Accountants we help all types of businesses including family businesses. Below is a quick guide to what you need to know about husband and wife businesses.

HM Revenue & Customs (HMRC) has shown great interest in businesses where both spouses are owners (either as shareholders or partners) but one spouse is considerably less active within the business than the other.

Legal Points to Consider – Income Shifting

It may be helpful to consider the basic situations which may involve income shifting:

• Main earner drawing a low (non-commercial) salary leading to enhanced profits from which dividends can be paid to spouse shareholder.
• Differing classes of shares enabling dividends to be paid only to spouse paying lower rates of tax.
• Dividends being waived so that higher dividends can be paid to spouse paying lower rates of tax.
• Dividends paid on shares that carry only restricted rights.

Income Shifting Is Less Likely To Be A Point:

• If the shares have considerable capital value
• If the main earner draws a commercial salary before dividends are declared

If Income Shifting Is Proven:

The income of the lower taxpayer is taxed as income of the donor of the gift (the settlor).

Points to consider

Several anomalies need to be considered:

• settlements by husbands on wives (and vice versa) are subject to rules which do not apply to settlements between any other relatives or friends. It is therefore discriminatory against married couples
• this approach contrasts sharply with the freedom available to married couples or civil partners in transferring assets between themselves without any capital gains or inheritance tax liabilities
• HMRC have sought to extend the application to partnerships, even though a partnership share is not a transferable asset
• unlike the view taken by divorce courts, HMRC's stated approach completely ignored the sacrifices that may be made by the “non-working” spouse in enabling the business to function at all
• for instance agreement to personal (matrimonial) assets being pledged as security for the purposes of the family business, as well as looking after the home and children etc
• ordinary shares do not carry with them a “right” to income; they carry a right to participate with other shareholders in the running of the company and to share in whatever assets remain in a winding up
• although shares transferred to a spouse may be considered to be substantially a right to income in the early days of a company, a successful company may well grow so that eventually the capital value of the shares may greatly outweigh the dividends received
• a stronger position may be created if husband and wife both subscribe for shares when the company is formed and both are directors from the outset
• make sure all shares carry voting and capital rights
• there is an argument for husband and wife receiving equal directors' fees rather than salaries and therefore not being employees, particularly if this is evidenced by a commercial agreement
• the position is also strengthened if husband and wife receive equal dividends
• aim to have the “non-earning” spouses involved in the business as much as is practical, thereby giving full value for any money received
• a company with substantial assets which generate income, or retained profits, is not so likely to be caught

If you are part of a husband and wife business, make sure you chat to an accountant to check everything is being managed correctly. At McDade Roberts we offer a free accountancy consultation on any accountancy issues for potential new clients so why not pick up the phone to arrange a convenient time.