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Maximising Tax Efficiency for Married Couples and Civil Partners
At AD Pottie Chartered Accountants, we know how important it is to make your business tax-efficient, especially for married couples or civil partners. One way to achieve this is by ensuring both partners fully utilise their tax allowances. Bringing a spouse into a business can unlock significant tax benefits. Here’s a straightforward guide to some of the options and considerations.
1. Creating a Partnership
If you’re a sole trader, you can bring your spouse into the business by forming a partnership. This allows you to divide the profits between the two of you, which can be very tax-efficient if one partner has a lower income or unused tax allowances.
Flexible Profit Sharing: Even if your spouse isn’t actively involved in the business, you can still allocate some of the profits to them.
Important Rules to Remember:
You can’t allocate a loss to one partner if the business makes an overall profit.
Similarly, if the business makes a loss, neither partner can show a profit for tax purposes.
This flexibility can help reduce your overall tax bill, especially if your spouse has other income that varies from year to year.
2. Transferring Part of the Business
If you transfer part of your business to your spouse, it’s essential to understand how this is treated for tax purposes.
If your spouse receives an equal and unrestricted share of the business, the transfer is treated as a tax-free gift under spousal tax rules.
However, if the transfer limits your spouse’s rights (e.g., they don’t have full access to the business’s capital), this could trigger extra tax rules, and the income might still be taxed on you.
It’s important to set this up properly to avoid complications.
3. Gifting Shares in a Company
If your business is a company, another option is gifting shares to your spouse. This can be an effective way to share profits through dividends while making use of both partners’ tax allowances.
How to Qualify for Tax Relief:
The gifted shares should carry full rights to dividends, voting, and any money left over if the company winds up.
Avoid shares with limited rights (e.g., shares that only pay income), as they may not qualify for spousal tax exemptions.
This method can be highly beneficial if done correctly and in line with tax rules.
4. Employing Your Spouse
Another option is to employ your spouse in the business. This can work well for both sole traders and companies, but there are some key points to keep in mind:
Pay Must Be Reasonable: The salary you pay your spouse must reflect the work they actually do for the business. HMRC will expect it to be a genuine employment arrangement.
Tax-Deductible Expenses: For the salary to count as a business expense, it must be exclusively for the purposes of the business.
Also, if you employ your spouse, you must comply with employment rules, such as paying at least the national minimum wage and reporting their income through payroll.
5. Selling a Business: Tax Relief Considerations
If you’re planning to sell your business, Business Asset Disposal Relief (BADR) can reduce the tax on any capital gain. To qualify, assets like shares or business property must be held for at least two years.
Spouse-Owned Shares
If your spouse owns shares but hasn’t met the two-year requirement, you may be able to transfer their shares back to you before the sale to ensure the relief applies.
Example:
Philip gifted shares in his company to his wife, Jenny. When they sold the business, Jenny hadn’t owned her shares for two years, so she didn’t qualify for BADR. By transferring her shares back to Philip before the sale, they saved nearly £50,000 in capital gains tax.
Planning ahead can make a big difference in situations like this.
6. Updating Regulatory Details
If you change the structure of your business, it’s important to notify HMRC and update your records.
Partnerships: File the necessary VAT forms if you’re VAT-registered.
Self-Assessment: Ensure any new partner or director registers for self-assessment.
Payroll: Update PAYE or construction industry scheme registrations if applicable.
HMRC must be notified by 5 October after the end of the tax year in which any new tax liability arises.
Practical Advice
Introducing your spouse into your business can offer significant tax savings, but it’s not something to do lightly. HMRC has rules in place to prevent arrangements that are purely for tax benefits. With the right advice, you can structure this change in a way that is both compliant and beneficial.
For tailored advice to suit your business, contact AD Pottie Chartered Accountants. We’ll help you find the best approach to maximise your tax efficiency.