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  • Tax

    LTD company share classes and distribution

    Hi All,

    I know seeking professional tax advice would be the recommended thing to do - but in the first instance I'd like to gather some opinions and suggestions on the following.

    I'd like to set up a ltd company to purchase any future properties in, which will purely be for holding BTL's.

    My thinking is that I would be a Director and my Wife would be a Secretary ( I understand there is no requirement to have a Secretary role ). These roles are justified as I do all the work involved in buying BTL's and my Wife occasionally gets involved to help with a bit of admin.

    My Wife is a higher rate tax payer and is always like to be, whereas I am just under the higher rate band and job security is a concern in the near future.

    My thinking to not have my Wife as a Director role is to negate any higher costs associated to the accounting that would be necessary if she had this role as well. However, I'd like her to have a role in the company as her salary looks good on paper when purchasing through the ltd company (if they look at personal finances of the ltd company members) when lending mortgages to the ltd company.

    One of my main queries is with regards to Share classifications and distribution of shares within the company. My thinking was to apply an AB class share structure, as I believe this would allow us to distribute any dividends in a quantity of our choosing to each position (Director & Secretary). So for instance if I held class A shares as Director role and my Wife held class B shares as Secretary role, then we could make her percentage of company shares held much lower than mine?

    ..."Dividends must be distributed according to the percentage of company shares owned by each shareholder, i.e. if you own half the company’s shares, you will receive 50% of each dividend distribution"..

    We may not even draw down any dividends for my Wife, but at least we would have the option to and at the amount of our choosing.

    I don't intend to take a salary for either of us, likely we will contribute any profits towards a pension instead.

    Does the above sound plausible? Am I missing anything?

    Many thanks.

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    Curious to know why you think having your wife as a director would affect accounting costs

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    I think the accountant said that there was more work needed on their part with regards to what they have to send in for Directors, whereas they don't have to do the same for a Secretary role? I could be wrong..

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    Can't think of anything. The shareholders will need to either do tax returns or call their dividends into hmrc depending on the level. Hmrc were asking all directors to do tax returns regardless of whether they had income but this has recently been challenged. With regards to her being included when trying to obtain funding my understanding is as a secretary she wouldn't be included. Their purpose is just to ensure filing of the confirmation statement. A broker on here may confirm. I would check whether your accountant is very experienced in what is a specialist area. There may be other salient facts we aren't seeing but on initial reading it sounds unusual. Are you aware as your wife is a higher rate tax payer she will pay 32.5% tax on any dividends exceeding £2000 ?

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    HI James

    Firstly to deal with the matter of your wife being a director, it will not affect the work to be undertaken as regards the company accounts any more than having her as company secretary would.  Secondly if you are looking to use your wife to help support mortgage applications then I would suggest getting advice from a good mortgage broker as my understanding is that lenders will only take directors into account as they have a direct responsibility for the management of the company whereas anyone else doesn't and hence cannot be used to secure finance. One final point I would make is that HMRC have recently announced that being a company diector will no longer automatically require a taxpayer to complete a tax return, each director will be assessed on their own merits.

    Moving on to the shares question yes using what are termed Alphabet shares will allow you to vary how dividends are paid out to different shareholders.  However you need to be aware that the shares must be Ordinary shares and not any other type e.g. Preference Shares.  They must also rank equal in all other respects.

    An additional point which is that in the current Finance Bill is that there are changes which will affect the capital gains tax position of Alphabet shaes moving forwards.  This change most probably won't affect you as you will be holding Buy to Let property which makes the company an Investment Company.  However if you were to change into devleopment (e.g. Flips) and become a trading company then the changes in the current finance bill would affect you.  In essence the changes affect the ability to claim Entrepreneurs Relief (i.e. pay 10% CGT on the first £10m of gain on sale of the shares).  The changes will require that each type of share held in the company not only qulaifies for 5% of the capital on liquidation or sale of the business but also 5% of all dividend distributions.  This change will therefore have an impact on some alphabet structured comapnies in the future.

    I hope that the above helps.

    Regards Nigel

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    Nigel Reynolds FCCA CMgr FCMI

    Property Tax Specialist

    Reynolds and Co

    http://www.reynoldsandco.co.uk


    Nigel - this clause has recently been amended following representations from the accounting bodies.

    Deb

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    Debbie Franklin

    Director of Tax Peplows Limited

    CTA ACA FCCA

    If spouses go too far with this and there is not sufficient reserves to pay equal dividends on each share HMRC will challenge it under settlements legislation https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-manual/tsem4225

    Deb

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    Debbie Franklin

    Director of Tax Peplows Limited

    CTA ACA FCCA


    Hi deb, Id just like to query what you mentioned about “settlements legislation”. If I was Director with 75% share ownership of class A shares and my Wife (high rate tax payer) had 25% share ownership of class B shares.. am I correct in saying that we could still assign different monetary values to each share class : For instance, A class shares with a value of £100 per share and B class shares with a value of a £1 per share. Then it would be 75 x £100 = £7500 to me and 75 x £1 = £75 to my Wife?

    Is this correct? 


    Thanks.

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    is it capital value or dividend extraction you want to be unequal ?

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    Debbie Franklin

    Director of Tax Peplows Limited

    CTA ACA FCCA

    Hi Deb,

    Appreciate your help with this..  As mentioned, my Wife is always going to be a high rate tax payer. I myself am currently just under the higher rate tax band whilst full time employed However, I plan to leave my job in the next 12-24 months and use rental income to replace my salaried job. We have two properties to date, which were both purchased in our own names. These have a deed of trust drawn up to specify a 99% ownership (and distribution of rental income) in favour of myself and a 1% ownership to my wife.

    I'm wanting to create this ltd company to purchase further rental properties via (to try an mitigate S24 moving forwards). The conundrum for me is that I don't know what share types, classes and structure to use would be best for us. I've spoken to my Mortgage Broker about what I need to do to ensure my Wife's income is included in initial mortgage applications made by the ltd company, as they will certainly look at the individuals incomes on the first few purchases. The answer to this was that as long as she holds at least 25% share in the company, then she will be included. I have therefore made her a Director with 25% of shares in the company.

    Does the below look like I've set the company up as best as possible taking into account what I've mentioned above?

    Myself : Ordinary A shares / Each share is entitled to one vote in any circumstances / Each share is equally entitled to a distribution of dividends / Each share is equally entitled to a distribution of capital / 3 shares (75% company)

    My Wife : Ordinary B shares / Each share is entitled to one vote in any circumstances / No dividend distribution rights / No capital distribution rights / 1 share (25% of company)

    - Do you foresee any issues with having my Wife's class B shares as having "No dividend distribution rights" (presumably this means she isn't allowed to get any dividends from the company?)

    - Similarly, the same question for "No capital distribution" ?


    Many thanks.

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