Dividends – Husband & Wife companies

When you form a new company, in which you will be the main income generator, should you subscribe for shares and give some to your partner, or should you both subscribe?

The answer – either way is OK and will be effective in splitting the income for tax purposes. The ruling by the Lords states that ‘where one shareholder is wholly or mainly responsible for generating a company’s income and allows their spouse to receive a share of it either by transferring shares to them or allowing them to subscribe for them when the company is formed, it counts as a ‘settlement’ (gift)’

For example, you set up a company and expect to generate a profit, after corporation tax, of around £137,000. If you owned all the shares in the company and took all of its profits as dividends, you would pay income tax of around £35,000. But, if half the shares were owned by your partner (who does not work), your joint liability on the same income would be halved to around £17,500.

Planning how many shares each spouse should own for maximum tax efficiency can be difficult as the company’s and both your income’s are likely to change from year to year. For this reason, consider issuing ‘Alphabet shares’ to each of you so that dividends can be varied.

If you would like help in forming a company and issuing shares, please give us a call on 01908 227055 or drop us an email.

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