I have a client who runs a small gift shop, started up in August 12 with his wife.
Initially we structured the business as a partnership which has worked well for the 12/13 tax year, but the business isn't doing as well as they had initially envisaged so the husband has got a job and will go onto PAYE.
My question is should I dissolve the partnership and set up the wife as a sole trader or leave the setup as is, and not pay the husbands part of the weekly salary payment, he would not then be earning anything from the partnership and it would not affect his tax? Would I have to assist him in putting in place a partnership agreement that states the wife earns 100% of the profits? There's no way she will break the lower tax threshold, even earning 100%.
Don't forget that if the company made a loss, 50% would be applied against the husbands other income and could result in tax back.
Also, would it be naughty to put an official £8k wage through PAYE for the wife, in order to create a loss, that was split 50/50, and get some tax back for the husband..... ;)
As this appears to still be a partnership, the husband and wife will each be taxed according to their profit allocations and earnings rather than any notional salary agreement.
Tax payable will depend entirely on actual profits and earnings in each tax year but as you say, by the sounds of it, it would be most tax effective to allocate all the profits to the wife this time. No need to end the partnership; just allocate 100% to the Mrs.
best wishes,
Tim
-- Edited by Don Tax on Wednesday 8th of May 2013 08:57:05 AM
I don't really want to get involved in creating false losses as I think that would complicate things (as well as a little bit naughty lol).
Don - If I don't need to end the partnership, I assume I should put in place a signed partnership agreement to prove that it was agreed for the wife to have 100% profits so it does not default to standard 50/50 arrangement?
Hi Nicholas, yep probably; to be on the safe side, but in any case it's quite justifiable because the husband has more or less ceased working in the business.
Briliiant thanks very much - This site can be simply invalueble for a second opinion for some of us who work alone, but it's good to know my instincts were correct.
