July 2003

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 » Challenge to limited company status  » Inheritance Tax opportunities

Challenge to limited company status

It has been a common tax planning arrangement for many years for ‘one man band’ limited companies to have shares in the name of their spouse.

In this way dividends can be paid to the spouse, who may have little other income and therefore not incur a higher rate tax liability on the dividends. In recent times the Inland Revenue has challenged a number of these situations under the Settlements Legislation. Their logic being that the income of the company is earned primarily by one spouse, even if the other is providing some administrative support and the payment of dividends to the lower income spouse is a tax avoidance device.

This is a new interpretation of old legislation and will be strongly challenged by many companies and their accountants. There have already been cases where the Inland Revenue has sought to go back six years and demand tax, interest and penalties running into thousands of pounds.

The Revenue has also moved from focusing on ‘one man band’ companies to look at the use of management companies which have been set up to run a group of small enterprises. It is also common for

spouses to hold shares in these companies, hence the Revenue attack.

There will be much highly publicised dispute with the Revenue through accounting firms and action groups with pressure also being applied to the Government.

We will keep you informed..

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Inheritance Tax opportunities

In the period before recent Budgets there have been expectations of changes to the Inheritance Tax regime.

Contrary to many forecasts it has not changed substantially since this Government was elected. Given the relatively benign current regime you should be making full use of the opportunities.
Planning wills can be an elaborate exercise and we would be pleased to advise but a basic rule is to ensure the nil rate band (currently £255,000) is not wasted, as would be the case if everything is left to the surviving spouse.
 

There are various opportunities for lifetime transfers and a review of the more obvious ones may be convenient:

• Transfers of up to £3,000 per tax year by any one person are exempt. Any shortfall, or non-use of this exemption can be carried forward for one year only.

• Transfers up to a total of £250 per tax year to any one person are exempt but cannot be used to cover part of a larger gift.

• Gifts in consideration of marriage by any one transferor are exempt up to the following limits:

- £5,000 by a parent of either bride or groom
- £2,500 by a grandparent or one party to the marriage to the other
- £1,000 in other cases.

• Potentially Exempt Transfers (PETs) offer the chance to make much larger gifts which basically escape Inheritance Tax if the donor lives a further seven years.

Please ask us before embarking on action to ensure you avoid pitfalls.

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The newsletter has been prepared for general interest and it is important to obtain professional advice on specific issues. We believe the information contained in it to be correct at time of print. While all possible care is taken in the preparation of this newsletter, no responsibility for loss occasioned by any person acting or refraining from acting as a result of the material contained herein can be accepted by the firm, the authors or the publishers.