Q My wife owns 20 per cent of the family business. Over the past few months there has been a lot of debate about income splitting or shifting. What is the latest situation and what should we be planning to do?
SB, HawickA Income shifting in its basic form involves an individual in a company or partnership arranging their affairs to gain a tax advantage by passing part of their income, via dividends or partnership profits, to another w
ho is subject to a lower rate of tax.
The government recently published draft legislation to counteract such arrangements. It is expected to be introduced in 2009 following an extended consultation period.
One scenario likely to be caught by the legislation would involve a 40 per cent tax-paying spouse who runs a business and their lower rate tax-paying spouse who does little or no work for the business but takes a proportion of the company dividend or the profits from the partnership. There is a tax advantage if the tax paid by two together is less than it would have been had they not shifted income.
The draft legislation works by identifying the amount of income which an individual (person A) has “shifted” to another individual (person B) and then dis-applying the arrangements, so the income is shifted back to person A for tax due.
It is advisable to review the structure of your business to ascertain what – if any – changes should be made. Increased record keeping will be required.
You should continue to review your affairs in light of any changes to the draft legislation. In particular it may be appropriate to pay significant dividends or distribute partnership profits prior to 5 April 2009 in order to benefit from the more relaxed rules currently in place.
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