Skip to content

This Site is Intended for Healthcare Professionals Only

Search AI Powered

Latest Stories

FINANCE: Husband and wife businesses

By Umesh Modi

HM Revenue & Customs (HMRC) has shown great interest in businesses where both spouses are owners (either as shareholders or partners) but one spouse is considerably less active within the business than the other.


Their weapon was the settlements legislation which HMRC will seek to apply where one spouse (the settlor) enters into an arrangement to divert income to the other spouse and in the process tax is saved. There has to be an element of bounty (i.e. “something for nothing”).

On the face of it, all transfers between husbands and wives could potentially be settlements. However, there is a statutory exemption where property passed to a spouse is an outright gift, unless

  • The gift does not carry the right to the whole of the income arising (i.e. income could still be payable to either spouse), or
  • A gift between spouses is wholly or substantially a right to income.

The legislation is not new but was originally enacted in the 1930s and brought up to date in the 1990s.

Legal testing

The well-publicised case of Jones v Garnett (Arctic Systems Ltd) was decided in the taxpayers’ favour. The House of Lords found that, although the wife’s share in the company was a settlement, it was not caught because it had been an outright gift.

It may be helpful to consider the basic situations which may involve income shifting:

  • Main earner drawing a low (noncommercial) salary leading to enhanced profi ts from which dividends can be paid to the spouse shareholder
  • Differing classes of shares enabling dividends to be paid only to the spouse paying lower rates of tax
  • Dividends being waived so that higher dividends can be paid to the spouse paying lower rates of tax
  • Dividends paid on shares that carry only restricted rights

Income shifting is less likely to be in point:

  • If the shares have considerable capital value
  • If the main earner draws a commercial salary before dividends are declared

If income shifting is proven:

The income of the lower taxpayer is taxed as income of the donor of the gift (the settlor).

Commentary

Until the Arctic Systems case was finalised, the application of the settlements legislation was largely untested. Several anomalies had been put forward:

  • Settlements by husbands or wives (and vice versa) are subject to rules which do not apply to settlements between any other relatives or friends. It is therefore discriminatory against married couples.
  • This approach contrasts sharply with the freedom available to married couples or civil partners in transferring assets between themselves without any capital gains or inheritance tax liabilities.
  • HMRC have sought to extend the application to partnerships, even though a partnership share is not a transferable asset.
  • Unlike the view taken by divorce courts, HMRC’s stated approach completely ignored the sacrifi ces that may be made by the ‘non-working’ spouse in enabling the business to function at all.
  • For instance, agreement to personal (matrimonial) assets being pledged as security for the purposes of the family business, as well as looking after the home and children, among others.
  • Ordinary shares do not carry with them a ‘right’ to income; they carry a right to participate with other shareholders in the running of the company and to share in whatever assets remain in a winding up.
  • Although shares transferred to a spouse may be considered to be substantially a right to income in the early days of a company, a successful company may well grow so that eventually the capital value of the shares may greatly outweigh the dividends received.

Prevention

A stronger position may be created if the husband and wife both subscribe for shares when the company is formed and both are directors from the outset.

Make sure all shares carry voting and capital rights.

There is an argument for the husband and wife receiving equal directors’ fees rather than salaries and therefore not being employees, particularly if this is evidenced by a commercial agreement.

The position is also strengthened if the husband and wife receive equal dividends.

Aim to have the ‘non-earning’ spouses involved in the business as much as is practical, thereby giving full value for any money received.

A company with substantial assets which generate income, or retained profits, is not so likely to be caught.

Source: Practice Track

This article is based on current legislation and practice and is for guidance only. Specific professional advice should be taken before acting on matters mentioned here. Umesh Modi BA ACA, is a Chartered Accountant and Tax Advisor, and a partner at Silver Levene LLP. He can be contacted on 020 7383 3200 or umesh.modi@silverlevene. co.uk

This article also appears in the March issue of Pharmacy Business.

More For You

Pharmacies have been advised to incorporate technology, automation, and enhanced PMR systems

Pharmacies have been advised to incorporate technology, automation, and enhanced PMR systems

Pic credit: iStock

Pharmacies remain a safe haven for patients, say safety officers

With ongoing issues over funding, workforces being pushed to the limit, patient safety concerns have been growing in the UK healthcare system.

Jackie Giltrow, chair of the Community Pharmacy Patient Safety Group (CP PSG), has reassured that pharmacies remain a safe place for patients, despite the many challenges facing the sector.

Keep ReadingShow less
Arthritis is the leading cause of disability amongst adults

Arthritis is the leading cause of disability amongst adults

Pic credit: iStock

Supporting patient with arthritis

Community pharmacies can not only offer healthy living advice but also stock medication and supplements that give people relief from chronic pain.

Community pharmacists can be a source of knowledge to help individuals that may be suffering from joint complaints, this may be from the specific conditions such osteoarthritis, rheumatoid arthritis, gout or just general aches and pains that come from daily activities.

Keep ReadingShow less
Men in England die nearly four years earlier than women

Men in England die nearly four years earlier than women

Pic credit: iStock

Pharmacies can drive men’s health strategy

With an estimated 65 per cent of men saying they avoid seeking medical attention for as long as possible, community pharmacies can help remove barriers to accessing healthcare.

The government is currently urging men of all ages to come forward and contribute to the development of England’s first-ever men’s health strategy, a key initiative under its Plan for Change.

Keep ReadingShow less
Patient care award at the Pharmacy Business Awards

Left to Right: Shailesh Solanki, Stephen Kinnock MP, Pritee Panchmatia, Brian Chambers, chief commercial officer at AAH and Rory Bremner

Driving success through innovation and teamwoWrk

Pritee Panchmatia has been pharmacist for over three decades. She reveals the secret to her success which saw her recognised for excellence in patient care award at the Pharmacy Business Awards.

Embracing technology is essential for improving work efficiency and patient safety, but investing in staff training and development is just as crucial for running a successful business – said Pritee Panchmatia, superintendent pharmacist and director of Howletts Pharmacy.

Keep ReadingShow less
The Importance of Teaching the Facts About Cannabis
https://www.pexels.com/photo/shallow-focus-photography-of-cannabis-plant-606506/

The Importance of Teaching the Facts About Cannabis

Cannabis has transitioned from a controversial substance associated with illicit activities to a widely accepted plant with medicinal benefits and potential recreational use. As the laws surrounding cannabis evolve in many regions, it becomes increasingly crucial to educate the public about its properties, benefits, and potential risks. Understanding cannabis can empower individuals to make informed choices, whether for personal use, health management, or advocacy. This knowledge is particularly important for younger generations who may face different societal perspectives about cannabis. In teaching the facts about this plant, we can cultivate a calmer and more informed dialogue about cannabis use in our communities.

Understanding Cannabis: A Historical Perspective

A significant aspect of cannabis education involves recognizing its historical background. Cannabis has been utilized for thousands of years for various purposes, such as medicine, textiles, and rituals. Ancient civilizations, including the Chinese, Egyptians, and Indians, wrote extensively about cannabis and its uses. The stigma surrounding cannabis began in the 20th century, largely due to prohibition efforts.

Keep ReadingShow less