02-08-2007
Possible tax changes for husband and wife business teams
A leading commercial lawyer has warned husband and wife business teams to brace themselves for heftier tax bills after a landmark House of Lords' ruling.
Iain Garfield, the partner in charge of BPE's commercial team, says a landmark case won by Geoff and Diana Jones, who own Arctic Systems, has prompted the Exchequer Secretary to the Treasury, Angela Eagle, to announce plans for proposals to change tax legislation.
"It has been a long-established tax reduction method for small businesses to split ownership of a family business between husband and wife, and then pay the wife a low basic salary so she becomes a basic rate taxpayer. As the wife takes a lower salary, there is more money left in the business to distribute to shareholders as dividends, and the wife subsequently pays less tax on the dividends," said Iain.
"The couple convinced the House of Lords that structuring their IT consultancy business to minimise their combined tax bill was legitimate. This now appears to be a hollow victory as the Government has announced plans to legislate to close the perceived tax loophole, which would ultimately affect hundreds of family businesses in the region,” he added.
Like many married couples running their own business, they each owned one share in Arctic Systems, and profits were generated by Mr Jones providing his professional services to the company's clients. He generally drew only a small salary, increasing the profits available for distribution. Mrs Jones worked part-time for the company and was paid an adequate salary for her work. The company's profits were then distributed equally between them as dividends.
"HM Revenue and Customs had argued that the payment of dividends by Mr Jones to his wife out of the company’s profits constituted a settlement for the purposes of the Income and Corporation Taxes Act, so tax was payable on the dividends at a higher rate as if they were the income of Mr Jones," said Iain.
"However although the House of Lords ruled there had been a settlement, the Law Lords found that under those arrangements there had been an "outright gift" to the wife which meant that tax was payable at Mrs Jones’ basic rate of tax," he added.
Although any existing wealth accumulated by husband and wife businesses through this method appear secure, the Government's review could threaten the future of this tax planning method.
"The proposals for reform are likely to clamp down on the tax saving arrangement used by thousands of husband and wife businesses, in order to ensure that in the future the ‘true earner’ is being taxed on the income. From the Government’s point of view, the case highlighted the need to ensure that there is greater clarity in the law regarding its position on the tax treatment of ‘income-splitting’," said Iain.
Iain Garfield, the partner in charge of BPE's commercial team, says a landmark case won by Geoff and Diana Jones, who own Arctic Systems, has prompted the Exchequer Secretary to the Treasury, Angela Eagle, to announce plans for proposals to change tax legislation.
"It has been a long-established tax reduction method for small businesses to split ownership of a family business between husband and wife, and then pay the wife a low basic salary so she becomes a basic rate taxpayer. As the wife takes a lower salary, there is more money left in the business to distribute to shareholders as dividends, and the wife subsequently pays less tax on the dividends," said Iain.
"The couple convinced the House of Lords that structuring their IT consultancy business to minimise their combined tax bill was legitimate. This now appears to be a hollow victory as the Government has announced plans to legislate to close the perceived tax loophole, which would ultimately affect hundreds of family businesses in the region,” he added.
Like many married couples running their own business, they each owned one share in Arctic Systems, and profits were generated by Mr Jones providing his professional services to the company's clients. He generally drew only a small salary, increasing the profits available for distribution. Mrs Jones worked part-time for the company and was paid an adequate salary for her work. The company's profits were then distributed equally between them as dividends.
"HM Revenue and Customs had argued that the payment of dividends by Mr Jones to his wife out of the company’s profits constituted a settlement for the purposes of the Income and Corporation Taxes Act, so tax was payable on the dividends at a higher rate as if they were the income of Mr Jones," said Iain.
"However although the House of Lords ruled there had been a settlement, the Law Lords found that under those arrangements there had been an "outright gift" to the wife which meant that tax was payable at Mrs Jones’ basic rate of tax," he added.
Although any existing wealth accumulated by husband and wife businesses through this method appear secure, the Government's review could threaten the future of this tax planning method.
"The proposals for reform are likely to clamp down on the tax saving arrangement used by thousands of husband and wife businesses, in order to ensure that in the future the ‘true earner’ is being taxed on the income. From the Government’s point of view, the case highlighted the need to ensure that there is greater clarity in the law regarding its position on the tax treatment of ‘income-splitting’," said Iain.
