Married to the business?

By no means do all married couples make good work colleagues. But some do, and even if your spouse isn’t regularly engaged in the day-to-day work of the business, there are certainly tax angles you should be considering. Here are just a few.

Partner or employee?

What I’m talking about under this heading is businesses which aren’t run (or not yet run) as limited companies. That is, the business is either a sole tradership of one of the spouses, a partnership or an LLP.

Let’s take the fairly frequently found situation where the business is making reasonable amounts of money but the spouse of the main operator has little or no income of their own. If the main protagonist in the business is making enough profit to go into the higher rates of tax (40 or 45%), and the other isn’t even using up their 20% bracket, clearly it makes sense, if possible, to even out the income a bit and divert some of it to the lower-earning spouse.

The two ways this is commonly done are by the main working spouse employing the other, and paying them a wage or bringing the other into partnership, with a share of the profits. Which of these is preferable?

Almost always, in practice, the partnership option is going to be better – at least looking at things purely from the tax point of view. First, a partner tends to pay far less National Insurance. An employee has a 12% contribution to make, and on top of this the employer has to pay 13.8%. By contrast, a partner, who is self-employed, has typically a 9% National Insurance charge to bear. Second, there isn’t the same need to justify the amount paid. HMRC can (and does) challenge a spouse’s wages if it thinks an unconnected person wouldn’t have been paid so much for the job they do. A partner, on the other hand, doesn’t have to justify the amount of profit share they receive in normal circumstances.

Limited companies

If your business is run through a limited company, and one of you does most or all of the actual work, what are your options?

Again, the option exists of the company employing the spouse who is less involved, and paying a wage. But the same issue arises of having potentially to convince the tax inspector that the employed spouse earns every penny they get.

An (often better) alternative is to give the spouse shares in the company, on which dividends are paid. As with the partnership scenario, there isn’t the same need to justify a dividend as there is a wage.

Some years ago now, this issue came up in the famous tax case of Arctic Systems Limited. It seems the husband, in that case, was doing all of the work but his wife received substantial dividends, which presumably were paid in order to use up her basic income tax allowances. The Revenue fought this one tooth and nail, saying the husband should have been paying tax on the wife’s dividends because they were a ‘settlement’ on her; but, after winning more than once in the lower courts, HMRC was roundly defeated in the House of Lords. Ever a good loser, it immediately announced its intention to change the law to what it wanted it to be. This was in December 2007. However, after a period of consultation, a suggested change to the law was abandoned – either because it was a very difficult one to police, being based on very nebulous issues of judgement, or because the recession hit business at its hardest at this point and the Government felt sorry for us.

Whatever the reason, no legislation has been proposed since, and so the current state of play seems to be that arrangements can be made to pay dividends to spouses without HMRC being in a position to counteract this.

Transfers of assets

Tax planning in the way of equalising income between spouses is made easier by the capital gains tax (CGT) rules. Any transfer of an income-producing asset is not subject to CGT if it is between spouses or civil partners. The asset concerned is treated as transferred between them effectively at original cost value – resulting in no gain, by definition.

This can obviously be particularly useful in equalising income from investments, including property portfolios. But do watch for one tax trap: unlike the position with taxes generally, stamp duty land tax still applies to transfers between spouses if there is ‘consideration’. One example of ‘consideration’ for such a transfer, which has caught out a number of married couples, is the transferee spouse taking over liability on a proportion of the mortgage or loans secured on the property. It may be possible to get round this by transferring an interest in the equity in the property to the other spouse, rather than their taking over any liability under the loan.

Business cars

This is an interesting example of the counterintuitive way the tax rules can sometimes work. The Government long ago gave up all pretence of making the tax system ‘fair’ as far as the provision of company cars was concerned.

Under the old system, there was a scale of charges, reduced for those who did high business mileage, and for those who were driving older and therefore less valuable cars, whose main aim was to approximate in a practical and workable way the value of what an employee was getting, in order to tax them on it.

That was all swept away by Gordon Brown in 2003. The current system is blatant and unashamed social engineering. It looks to discourage and penalise the use of cars, particularly of the more polluting variety.

So now the system works like this. A percentage of the car’s list price when new is charged as if it were income of the employee who receives the benefit (also where a member of his ‘household’ receives the car benefit). This percentage is based purely on the car’s CO₂ omissions, and so there is no allowance for preponderant business use, but also, conversely, no extra penalty for preponderant private use.

On the other side of the coin, the company or business paying for the car (including covering its depreciation and standing costs) gets 100% relief for these expenses.

So, counterintuitively, as I say, the rules tend to favour giving a non-working spouse a company car perk. Let’s look at a typical, even stereotypical, scenario.

Gary Flashman is a go-getting entrepreneur. What attracts him to business is being his own boss and the ability it gives him to lead a lifestyle of ‘conspicuous consumption’. One of the things which go with this conspicuously successful lifestyle is the so-called trophy wife, and Mary Flashman is just that. She enjoys having all the good things that Gary’s profitable business enables them to buy: a nice house, designer children, expensive jewellery etc.: but as to involving herself in the business, no way. For one thing Gary wouldn’t be able to stand it, and for another their business just doesn’t interest her.

So Gary, on the advice of his accountant, buys her a sensible car, a hybrid people carrier, through the company. Every penny that this car costs, including all of the flash accessories which Gary insists be fitted for her to boast about to the friends she lunches with, goes through the company and gets corporation tax relief. Mary does quite a high mileage, but absolutely none of it is on business. So the benefit she is getting out of the company is at its maximum. But the tax rules actually give a very low benefit indeed, because the car is a hybrid and therefore has very low CO₂ omissions.

Gary himself, on the other hand, owns his Maserati personally, and, when he drives it on business, charges the company a mileage: a small fraction of what the car actually costs him, but better than nothing.

You get the idea. In these days where the two-car family is the norm, sensible couples think about tax before they decide how to finance the purchase of these vehicles.
   

  
Alan Pink FCA ATII is a specialist tax consultant who operates a bespoke tax practice, Alan Pink Tax, from offices situated in Tunbridge Wells. Alan advises on a wide range of tax issues and regularly writes for the professional press. Alan has experience in both major international plcs and small local businesses and is recognised for his proactive approach to taxation and solving tax problems. Alan can be contacted on (01892) 539000 or email: alan.pink@alanpinktax.com . His book, The Entrepreneur’s Tax Guide, is on sale from Head of Zeus for £20, and from all good bookshops.