Business in Practice - What is your spouse worth?
Date of Issue: 24th January 2008
Business
in Practice
A regular column of general business advice brought to you
by Bates Weston, business advisors and chartered accountants.
Graham Buckell is the Tax Advisory Director at Bates Weston, and with over 25 years experience in corporate and personal tax, he advises on all aspects of direct tax. |
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'Her/his price is far above rubies” according to the Old Testament (Proverbs 31:10). Divorce courts also tend to regard a spouse as of great worth (at least 50%), but H M Revenue & Customs are not so sure.
Last month H M Revenue & Customs issued its consultative document on the subject of income shifting. This was in response to its defeat in the House of Lords last summer in the case of Jones v Garnett (often referred to as the Arctic Systems case).
To recap briefly, since the introduction of independent taxation, it has been acceptable for spouses to share income from assets such as rental properties or quoted shares (i.e. assets with real capital value). However, it was not acceptable to shift assets that were considered to be substantially a right to income. This was thought to include shares in companies that were essentially supplying the services of a single individual. It should be noted that there was nothing to stop shifting income between unmarried partners or others.
The proposed new legislation is intended to apply from 6 April 2008 to two forms of income - profits from a partnership; and company distributions, most commonly dividends.
It will only apply where
- An individual has the power to control events, including the
amount of income transferred.
- one of the reasons for doing it is tax avoidance and
- the overall tax between the two parties has been reduced
The problem that arises is the need to assess the commercial value of the person to whom income might have been shifted.
In the classic example of the company that supplies the services of a single individual, how do you assess the contribution of the spouse? Is she he being rewarded in excess of her/his commercial value? Some cases may be simple, i.e. there is no contribution whatsoever, but these will be few.
The new legislation is more far reaching than the old. For example, it will cover
- Income shifting between unmarried persons
- Transferring shares in companies of more substance (but where the transferor still controls the level of dividend) to spouses
With legislation coming into effect on 6 April (unless calls to defer it by 12 months are heeded), there is very little time to consider what action might be needed and implement it in time for the next tax year. As a large proportion of small business owners will be affected by these changes, it is important to speak to your business advisors as soon as possible.
If you would like to speak to the Bates Weston Tax Advisory team, please contact Graham Buckell or Vanessa Johnson on 01332 365855 or by email to grahamb@batesweston.co.uk or to vanessaj@batesweston.co.uk.
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