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When spouses or partners own a company, it is possible to provide them with tax-efficient perks as shareholders. This article will explore the rules and guidelines of HMRC to ensure compliance with company law and tax regulations.
Benefits in Kind for Shareholders
Companies can offer benefits in kind not only to their directors and employees but also to their shareholders without violating company law. This arrangement could be suitable for companies with few shareholders, where one or more shareholders are not directors, such as a company owned by a married couple. However, it is crucial to consider the tax consequences before implementing this strategy.
Special Rules for Close Companies
HMRC defines a close company as one controlled by five or fewer individuals, typically its shareholders. There are specific rules for taxing non-cash benefits a close company provides to its shareholders. Shareholders receiving a benefit will be taxed as if they had received a distribution (dividend). The taxable amount is determined using the same methods for calculating taxable benefits for directors and employees. This approach can be tax-efficient, as the overall tax bill payable on distributions is typically lower than that for benefits taxed as earnings due to lower tax rates and no National Insurance (NI) liability.
Anti-Avoidance Rules and Tax Implications
HMRC has implemented anti-avoidance rules to prevent any tax advantage from using shareholder benefits. A benefit is only taxed if a distribution (dividend):
- It is not chargeable as earnings under a different rule, i.e., as earnings because the recipient is a director or employee.
- It is provided to a shareholder who is the spouse of a director or employee, but not either themselves. In this situation, the benefit is taxable on the director/employee.
Reducing the Overall Tax Bill
If a director delegates minor duties to their spouse, the spouse could be put on the payroll, and the benefit could be treated as the spouse’s income. If the spouse’s pay is not disproportionately high relative to work done, the second anti-avoidance rule mentioned above will not apply. In addition, if the spouse’s tax rate is lower than the director’s, this strategy will reduce their overall tax bill.
Tax Savings for Unmarried Shareholders
Providing benefits to a shareholder who is not an employee or a director but is married to one does not result in tax savings due to the anti-avoidance rules. However, tax and NI savings can be achieved under slightly different circumstances.
If a director and their partner are not married, or in a civil partnership, neither of the anti-avoidance rules will apply. Consequently, the partner will be taxed on the benefit as a distribution, leading to tax and NI savings. In some cases, the benefit might even escape tax altogether. If you need help to plan your taxes, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.