, UK Tax Law, section 660

A further complication added to tax law

The s660a tax rule was introduced in order to block income being passed to a shareholder in the family [was useful to reduce the overall tax bill]. A limited company was typically set up with one working Consultant and a non-working spouse. The non-working spouse would waste all their unused personal income tax allowance together with any lower rate tax bands if no income were attributed to them in the relevant tax year. Accordingly, it was possible to allocate sufficient shares in the limited company to the non-working spouse which thereby caused dividends to be payable in the ratio of the shareholding. For example;

  • personal allowance 6,000
  • lower rate tax band 24,000
  • higher rate tax therefore starts at 30,000 income
  • say company profits for the year are 60,000
  • spouses own shares 50:50
  • dividend must therefore be split 50% to each spouse
  • each spouse records annual income 30,000
  • neither spouse pays tax at higher rate

There are various types of share that one can use in a limited company, e.g. Ordinary Shares or Preference Shares. The above example is a simplification since, depending on the type of share holding, whether the shares convey the right to vote at Board meetings regarding the company's affairs or whether they are non- voting shares with no such rights, there are further tax implications.


There are also family owned and operated companies in which various, if not all, family members work and own shares. In these companies it is common for family members to receive both a salary for work done, and one or more dividends during the year based on profits earned by the company. Incentive to run the company well. The Inland Revenue argue that if a spouse receives their income from the work done by the other spouse, then that income is a 'settlement' as defined by section 660a. The working spouse has given the non-working spouse a right to his or her income.

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