Dividend allowance, CIS issues, Tax Credits

Last week we examined how shares held in a micro-company can be used to spread income among family members and save tax. We also analysed the current problems with the HMRC online service for CIS, and the fixes available. Finally, we had a reminder about tax credit claims which need to be renewed this month.  

This is an
extract from our topical tax tips newsletter dated 21 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
  
Dividend allowance 
From 6 April 2016 every individual can receive up to £5,000 of dividend income per year, tax free, whatever their marginal rate of tax, by using the dividend allowance. Spreading dividends among family members can save tax, but only if the correct company secretarial procedures are followed. 

The spouse, child, or other relative of the company owner, can only receive a dividend from the company if they hold a share which entitles them to receive the dividend. In last week’s newsletter (14 July 2016) we examined what can go wrong if dividends are paid to someone who is not a shareholder. 

Your first step should be to examine the authorised and issued share capital for the company. Many micro-companies operate for years with only one share in issue. If the company owner wants to divide their shareholding with their spouse, the owner needs to hold sufficient shares in order to pass some shares on. 

This may mean more shares have to be issued. Different categories of shares will permit dividends to be paid at different rates and at varying times to each shareholder. To avoid the settlements legislation applying, the new shares should carry full rights to capital on a winding-up as well as variable dividends. 

A gift of shares between spouses or civil partners will be a no gain no loss transfer for CGT. Gains arising on gifts of shares to other individuals will be taxable, but small gains may be covered by the donor’s annual exemption (£11,100) or could be held-over under TCGA 1992, s 165. 

Shares given to employees of the company can subject to income tax as employment-related securities, but there is a general exemption from that legislation for gifts made as part of a family relationship. As an alternative to gifting shares, family members could subscribe directly for their shares. 

Although the dividend allowance taxes up to £5,000 of dividends at 0%, that dividend income is counted for the high income child benefit charge, and for £100,000 threshold that withdraws personal allowances. The tax effect on the recipient of the dividend should be calculated before the dividend is declared or paid. 

This is an
extract from our topical tax tips newsletter dated 21 July
2016 (5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>
 
The
full newsletter contained links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.
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