What is “income shifting”?

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“Income shifting” is a tax avoidance technique aimed at using the allowances and thresholds applicable to limit your tax costs. If you or your partner operates through a limited company you might not be taking advantage of this to reduce your tax liability.

Let’s use an example to explain:

Karl and Katy are married. Karl works as a web designer through his own Ltd. company, of which he is the sole director and shareholder. Katy looks after their daughter and works part-time. Occasionally she does some admin for Karl.
Karl pays himself a salary and annually takes a dividend. To take more money out of the company Karl’s accountant suggests that he gives some of his shares to his wife so that she can also take dividends. Since Katy does some work for Karl, the accountant suggests she receives a salary as well.

However, we would urge caution if you consider this method yourself. Though legal under current regulation, should the transfer of shares be regarded as a ‘settlement’ it may not be allowed. HMRC has been clamping down on possible breaches. It’s certainly worth a discussion with a chartered accountant.

Take note of this example: Garnett vs Jones (re: Arctic Systems) [2007]

Mr Jones bought Arctic Systems Ltd and the gave one of his two shares to his wife. Mr Jones worked as a consultant while his wife did admin tasks. Though both received low salaries they took large dividends.
HMRCs argument was that Mr Jones’ wife’s remuneration was out of line with her contribution to the business and was in fact a settlement and taxable as part of Mr Jones’ income.

Mr Jones appealed, arguing that the distribution of the profits from the company did not constitute a settlement, and that the transfer of share to his wife was an ‘outright gift’.

The House of Lords agreed with him, though the government is now changing the legislation to prevent future similar cases.

Give us a call is you want to learn more.

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