TAX CLINIC
By Graham Webber Director of Tax at WTT Consultancy
There are no reasons why any individual, including a spouse, cannot be a director of a company provided that they are not barred from holding such a post. But anybody so appointed will need to bear in mind the requirement that Directors are required to look after the interests of the company and its creditors. You also have to consider what happens if the marriage breaks down and divorce proceedings start, explains Graham Webber Director of Tax at WTT Consultancy.
In considering whether to make a spouse a director of a company, due care and consideration needs to be given to why this is thought to be of benefit.
Making a spouse a director simply to share the income from the company and to make maximum use of tax free allowances and basic rate bands of tax, has been challenged by HMRC in the past.
That challenge ended in defeat for HMRC but they have since made changes to rules and how they are interpreted and an arrangement made solely for tax purposes will likely bring an enquiry. Even if that enquiry results in no further tax due, the cost of responding to it in terms of time and professional fees can be high.
If the appointment is made prior to extracting funds from the company – perhaps funds that have accumulated prior to the appointment – then again, HMRC will take an interest. In extreme cases it’s possible for HMRC to argue that the grant of shares is a capital gains tax event or even creates a trust. These have the capacity to create tax charges.
There are many reasons why having a spouse as a director is a benefit and these are often outside the immediate tax savings available. HMRC is however aware of the capacity for saving tax and NIC and can be expected to make an enquiry even if this is a light touch.
What are the pros and cons of making a spouse a limited company director? Such as tax benefits?
Sharing the duties and responsibilities is often a benefit. It is possible for the spouse to be rewarded for acting as a director but there are rules – albeit with uncertain boundaries – as to how much can be paid to such a director. In general, the payment must reflect the value brought by the director. In practice, payments of salary up to the present tax-free allowance are often not questioned.
Do you have to make them a director to get these benefits especially if they do not carry out work for the business? Or could you have the same benefits if they were just a shareholder or company secretary?
A shareholder can receive dividends that will not attract NIC (employee or employer). Dividends to the same class of shares must be at the same rate. It would not normally be possible to pay more dividends to a spouse than the shares allocated. Arrangements to waive dividends or create different share classes will attract HMRC’s attention.
What do you have to be aware of in the event of a divorce and your spouse is a director in your company?
A spouse holding shares in a company owns them completely. If a divorce were to happen, they are an asset to be counted in any division of assets.
If your spouse is already a director, can they change roles?
The role of a director is very wide and can include any activity that is to the benefit of the company.
