A typical situation would be when a sole company director is earning over the higher rate tax threshold, and their spouse or civil partner is earning below it, and hasan unutilised personal allowance.
In our view, this is possible, provided you can demonstrate the family member is playing an active part in the business, and is therefore entitled to some form of compensation. HMRC have recently become very interested in company set ups where a non-active spouse or partner is earning, whilst not working in the business. The family member could become a director in the company, managing administration or doing marketing. Being on the payroll is not necessary, so he or she could earn only dividends but no salary.
How to distribute shares
Assuming you have made the decision to go ahead, you now need to determine what shareholding you want to give your family member. The shareholding percentage is directly related to any dividend payments they will be paid.
Dividends are paid out of company profits, according to the amount of shares each shareholder owns. For example, if the dividend declared was £10,000 and the shareholding was split, with you holding 75%, and your family member holding 25%, you would be paid a dividend of £7500 and they would be paid £2500.
We would like to remind you that corporation tax is calculated on the net profit, before dividends are paid, so you should also retain enough money in the business to pay the corporation tax, before paying dividends.
You can gift shares to your spouse if certain conditions are fulfilled. As a best practice, however, we would recommend issuing new shares rather than transferring existing shares. Transferring existing shares may involve capital gains tax implications.
The Companies Act stipulates a number of procedures to be followed whenever new shares are issued or a new director is appointed. Unless you are absolutely certain that you know what you are doing, it is a good idea to get an experienced professional to assist you as any mistake made is likely to cost you time and/or money to rectify.
We would be delighted to help you with modelling what would work best for you, so please contact us on 01256 406 601.