I see that the Chancellor has postponed bringing in a new law to tax family companies who share business profits between spouses, the so-called income shifting rules. I’m an IT contractor starting a new company through which I will provide my services. In light of this would you advise me to issue shares to my wife on the formation of the company to help avoid higher rate tax in the future?
The proposed income shifting rules were to supplement the existing settlement rules that tax the artificial transfer of income between spouses. If your spouse holds shares and receives dividends from your new company you may avoid higher rate tax, but you must also avoid being caught by the settlement rules. To do this give your spouse ordinary shares which have full voting rights, which you have subscribed for yourself. It is good practice for your spouse to also be a director of the company and take part in all major decisions, such as who to bank with, and when dividends should be issued. Whilst the Chancellor has said income shifting rules will not be introduced in the Finance Act 2009, there is no guarantee that the law will not be changed the following year as the Chancellor has said it will be kept under review in the most tax efficient manner. However, for now it does work. Please note this advice is on the assumption you are not caught by the IR35 service company rules.