Husband and wife businesses

There are tax planning opportunities available to husband-and-wife businesses, but care needs to be taken. If you are in the Devon area, Northams can guide you through the options. This article provides an overview...

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The legislation is not new, but was originally enacted in the 1930s and brought up to date in the 1990s.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

Income shifting is less likely to be in point:

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:

Prevention

If you are a husband-and-wife business in the Devon area, the team at Northams can help you. Contact us today.