Tax Planning for Consultants

Tax planning for consultants always depends upon their personal and financial circumstances. There is no ‘one size fits all’.

Some questions we are frequently asked by consultants

Having said that, there are some questions that regularly crop up:

Can I pay my spouse a salary or a pension contribution out of my Private Practice income?

The short answer Is YES. If you pay your spouse a salary or a pension contribution at a commercial rate for the work they do for your private practice, HMRC will not object.

Depending upon your individual circumstances this could save a significant amount of tax.

But you do need to be careful, see ‘Paying Family Members‘.

Can I make my spouse a shareholder in my Limited Company and pay them a dividend?

Following the decision in a leading tax case, provided a spouse holds ordinary shares which entitle the spouse to more than just income, the dividends paid on those shares will be treated as the spouse’s income.

We have many consultant clients who have relied on this decision for many years with no challenge from HMRC.

If I retain funds earned from Private Practice in my Limited Company, and withdraw the funds when I finally retire, will I obtain Entrepreneur’s Relief and pay tax at 10%, rather than 40%?

These transactions were exempt from certain anti-avoidance tax provisions until 2016.

Since 2016 anti-avoidance provisions could be used to tax a distribution (the final release of funds) as a dividend rather than a capital gain. In these circumstances a tax rate of 32.5% or 38.1% rather than the 10% Entrepreneur’s Relief rate will apply.

We are not aware of any cases since 2016 where these anti-avoidance provisions have been used to attack so-called ‘money box’ companies.

We would usually suggest that a regular amount of funds are distributed annually by dividend (taxed at 32.5% or 38.1%) the balance of the funds being retained.

If the 10% tax rate is then challenged on a final distribution we would argue that the company was not a ‘money box’ company, that regular dividends have been paid and that there was no abuse of the tax system.

I understand individuals pay more tax on ‘buy to lets’ than companies. Could I transfer my small ‘buy to let’ portfolio to a Limited Company?

Broadly speaking limited companies get a full deduction for the Interest charge on a ‘buy to let’ mortgage whilst a higher rate individual tax payer does not.

However, if an individual transfers a small ‘buy to let’ portfolio to a limited company the transfer may:

• Trigger a capital gains tax charge.
• Create a stamp duty charge.
• There is also the potential difficulty of persuading a lender to move the ‘buy to let’ mortgage to the limited company.

For these reasons we would not normally recommend you transfer your small ‘buy to let’ portfolio in this way. The advice may be different if you have a substantial residential property rental business.

Nothing noted above should be construed to be tax advice. In all instances you must take tax advice from a professionally qualified advisor who will advise on your individual circumstances.