john banks

Accountant is away on holiday, and this is a surprisingly sensible place to ask advice.

To legally avoid going into the next tax threshold with income from a new source, is it possible to form a business partnership or other structure with your spouse who has some room before her next tax threshold to share the income? Is there a minimum amount of work that she would have to do?

I know for my medical practice you can only justify a salary to your wife if she does real work for a reasonable rate, and since she doesn't, we don't. But is it different if she is a not an employee but a business partner?

If there is no legal way to avoid the tax, I would rather do less work than pay extortionate rates of income tax.

Luminous

iTrader: (3)

Not being an accountant I don't think I can answer you question directly. However a workaround could be for your spouse to setup a venture, say XYZ consultancy. This consultancy then invoices you for her advice with regards to your business venture. The payment you would then make to her would be part of her income, and part of your cost reducing your income.

Obviously real work will have to be done, otherwise I think you could be on sticky ground. However, given the exorbitant consultancy fees that are allowed in most other lines of business the actual provable level of work may be very low indeed.

MattW

John

I do this with my wife. You can split a shareholding 50/50 and pay a dividend based on the shareholding. you could also waive your dividend if you so wished, but not sure of rules surrounding that.

The govt lost a case (see Arctic Systems) and planned to close the loophole, the credit crunch put paid to it but it may crop again.

MattW

Bit of background:

Arctic Systems: timeline and background on the case - Accountancy Age

She won't need to do any work and you may gift your shares to a spouse without penalty.

john banks

Thanks MattW, interesting avenue.

Trout

iTrader: (1)

I do it this way - shared ownership and shared dividend. You don't need to work to get the benefit of dividends.

You could also look at setting up a trust to pay your dividends into.

john banks

What sort of paperwork do you need to setup for that sort of arrangement? She has already told the tax office she is a sole trader and didn't pay class 4 NI because it was only occasional consultancy below the small earnings exemtion.

To become a partnership we could just draw up a document, and to pay a dividend you just make a payment and tell the accountant?

Trout

iTrader: (1)

It is NOT a partnership that is a whole different kettle of cod.

You need to have a limited company and assign shares. Your accountant can do it - very easy and cheap.

Then you pay a dividend. Dividend is 'effectively' tax free to around £35,000 each (computation is complex but that is net effect). You will not pay NI against dividend income.

So, I have a miminal income, get large dividends and live off the fat of the state as well as my earnings. For the last two years we have had an effective six figure income and paid no tax. This year earnings have gone up and so has tax - about 40% of what I was paying before in a job!

This is very efficient.

john banks

I thought you had to pay corporation tax though, this is said not to make becoming a limited company a tax efficient idea for most medical practices? But this situation is different. The new income source will be under that £35k limit.

MattW

John

I was referring to ltd, have no idea about sole traders.

Trout

iTrader: (1)

You will be liable for corporation tax - however you can mitigate the tax on that somewhat - still a fraction of income tax.

You really are best speaking to an accountant - try P20 SPD

john banks

Thanks Trout, the ideas are most appreciated and interesting. P20 SPD would I'm sure be great, but realistically I can't move the whole practice over to him and it would get complex having two accountants.

john banks

I've just realised, with her being employed and me already self employed and both paying income tax, we'd have to pay tax on the dividends just like we do with dividends from any other shares. But it is a means of transferring income to the better half.

thesyn

Depends how much you are talking about but I expect it will be a lot of effort for possibly little gain.
I know what you mean though, some of the 'none core' related work that I did in previous years is quite simply no longer worth doing.

john banks

Saving is about £4k once expenses and differences in tax rates are considered. I'd rather have that than the tax man if it is legitimate. If I had a truly portable business I'd just leave the UK the way the taxation system is going.

Trout

iTrader: (1)

And I have just discovered he is on holiday too

Deep Singh

I've been toying with becoming a ltd company for the same reason John, ie the coming tax rises. In the end I decided to cut down my work, I'm not killing myself to hand half over to the state. I now work 3-4 days a week and am enjoying spending time with the kids (used to work 6 days a week, 10-12 hour days)

If the state reverses the tax rises at some point I'll consider working harder again, if not, it gives me a perfect excuse to take life easy