Cat and Mouse
Does the world of tax sometimes feel like a game of cat and mouse? No sooner has the government blocked one course of action than the race is on to find some other means to reduce tax liabilities.
The last 12 months has seen attention focus on husband and wife companies. In particular the Inland Revenue’s suggestion that where the company pays dividends to a basic rate taxpaying spouse when the other is a higher rate taxpayer this may in some circumstances be challenged under the ‘settlement’ provisions as artificial and designed to avoid tax.
Whilst the position is far from clear the government has introduced rules to remove any possible tax advantage in one particular set of circumstances namely where certain shares are jointly owned by husband and wife. They clearly objected to the ability to have shares owned as to say 99% by one spouse and 1% by the other whilst the income was split equally between them.
The problem stemmed from the fact that normally income from property jointly owned by a married couple is treated for income tax purposes as belonging to them in equal shares unless an election is made for the income to be split according to the actual proportions of ownership and entitlement to income.
From 6 April 2004 married couples are taxed on dividends from jointly owned shares in ‘close’ companies according to their actual ownership of the shares. Therefore if the ownership is 99%:1% then that is how the income will be split subject to the settlement provisions. Close companies are broadly those owned by their directors or by five or fewer people. Clearly this catches most family companies.
The change is limited to close company shares and does not affect the treatment of other jointly owned property. For example rental income from an investment property can still be split 50:50 even where the ownership of the underlying capital is different.
Please contact us if you have any questions arising from this article or on anything else in this newsletter.