Income shifting rules on hold
The government has postponed new laws that would prevent people reducing their tax liability by shifting business income to another person such as a non-working spouse or civil partner. This may provide some valuable tax planning opportunities.
Although proposals were announced last December, aimed at an April 2008 start, the government decided further consultation was needed. The difficulty is to frame legislation that distinguishes between ‘acceptable’ business arrangements and ‘income shifting’ to avoid tax, while providing clarity and certainty for businesses. It’s a tall order.
The delay gives businesses an extended opportunity to save tax by paying dividends up to 5 April 2009. Since losing the Arctic Systems tax case in the House of Lords last year, HM Revenue & Customs (HMRC) has confirmed that where a non-working spouse holds ordinary shares with rights to the company’s capital, dividends can only be taxed as the income of the spouse to whom they are paid.
You can therefore save tax by paying dividends in the current tax year up to the limit of a non-working spouse’s basic rate income tax threshold, ie up to £40,835. Remember though that you have to count as income the 10% tax credit as well as the cash dividend itself.
You should also deduct any other income your spouse might have, such as bank interest. You can even give your spouse shares shortly before paying the dividend, provided the gift is unconditional and is of ordinary shares with full voting rights.
Because the 10% tax credit is not repayable, all or part of the personal allowance of £6,035 is wasted if other income is less than this amount. If your spouse or partner does some work for the business, you could increase the tax saving by paying some salary as well. The salary will be deductible from business profits, provided it is a reasonable amount for the work done.
We can advise you on how to make best use of the current rules. There are some restrictions on paying dividends, but we can check whether they affect your company. This will probably be your last chance to save tax in this way, although further delays cannot be ruled out. We can also consider whether you should change the way your business is set up for the future.