Lever House
61 Chorley New Road
BOLTON
BL1 4QP
Tel: 01204 365165
Fax: 01204 364509
News
Income shifting legislation delayed
If you are a shareholder-director in your company with your spouse or civil partner, you may be thinking about declaring dividends at this time of year and taking advantage of certain tax-saving benefits.
Arrangements involving the gifting or purchase of shares in businesses where one shareholder, often a spouse or civil partner, is taxed at a lower rate than the prime income generator, are called 'income shifting'. This was made possible by the introduction of independent taxation in the early 1990s.
Arctic issues
The 'Arctic systems' case in 2007, officially Jones v Garnett, threatened to make such arrangements unlawful. Mr and Mrs Jones were shareholders in a small private limited trading company that paid part of its profits out as dividends to try to reduce the impact of income tax on moneys extracted from the company.
For one year in which the Jones' both took salaries of around £20,000 and the balance of the income they needed as dividends, HM Revenue & Customs (HMRC), then the Inland Revenue, challenged that Mr Jones, as the prime income generator, should pay income tax on all of the dividends, on the basis that the 'arrangement' surrounding the shares constituted a 'settlement' in which he had an interest.
The House of Lords' eventual ruling in favour of the Jones' in July 2007 dismayed the government and HM Revenue & Customs (HMRC). HMRC had hoped to be able to assess other such shareholders in a similar way. Immediately after the case, the government vowed to bring in legislation to close this loophole in the tax system.
Hold on legislation
New rules were expected to be in place, effective from tax year 2009/10. The legislation has now been further delayed and it is not known when it will be enacted. It could be in force from tax year 2010/11, but this is still unclear.1
For shareholding directors of companies in a similar situation, it should still be possible to take dividends and be taxed individually on those dividends in the proportions in which they are received, at least for the next tax year.
However, it may be prudent to be careful when choosing the size of the dividends declared. If you need guidance, let us know. The Financial Services Authority does not regulate tax advice.
1. HMRC, Pre-Budget Report 24/11/08
If you are a shareholder-director in your company with your spouse or civil partner, you may be thinking about declaring dividends at this time of year and taking advantage of certain tax-saving benefits.
Arrangements involving the gifting or purchase of shares in businesses where one shareholder, often a spouse or civil partner, is taxed at a lower rate than the prime income generator, are called 'income shifting'. This was made possible by the introduction of independent taxation in the early 1990s.
Arctic issues
The 'Arctic systems' case in 2007, officially Jones v Garnett, threatened to make such arrangements unlawful. Mr and Mrs Jones were shareholders in a small private limited trading company that paid part of its profits out as dividends to try to reduce the impact of income tax on moneys extracted from the company.
For one year in which the Jones' both took salaries of around £20,000 and the balance of the income they needed as dividends, HM Revenue & Customs (HMRC), then the Inland Revenue, challenged that Mr Jones, as the prime income generator, should pay income tax on all of the dividends, on the basis that the 'arrangement' surrounding the shares constituted a 'settlement' in which he had an interest.
The House of Lords' eventual ruling in favour of the Jones' in July 2007 dismayed the government and HM Revenue & Customs (HMRC). HMRC had hoped to be able to assess other such shareholders in a similar way. Immediately after the case, the government vowed to bring in legislation to close this loophole in the tax system.Hold on legislation
New rules were expected to be in place, effective from tax year 2009/10. The legislation has now been further delayed and it is not known when it will be enacted. It could be in force from tax year 2010/11, but this is still unclear.1
For shareholding directors of companies in a similar situation, it should still be possible to take dividends and be taxed individually on those dividends in the proportions in which they are received, at least for the next tax year.
However, it may be prudent to be careful when choosing the size of the dividends declared. If you need guidance, let us know. The Financial Services Authority does not regulate tax advice.
1. HMRC, Pre-Budget Report 24/11/08