Tuesday, April 22, 2008

How to divert your income and pay less tax!

If you are a higher rate taxpayer (like more and more people nowadays!), you may be able to reduce your taxes by transferring some of your income to others, so that the income can be taxed at a lower rate of income tax or not be taxed at all!

It sounds reasonable, doesn’t it? (Especially if good old wife or husband does some work for the business, wouldn’t it make sense to reward them by transferring some of your shares in the company to her or make her a partner in the partneship or allocate some rentals from a property lettings business to her?)

The problem is that the taxman doesn’t like arrangements which he believes were made just with tax avoidance in mind. If the taxman thinks so in your case, he will most definitely disallow the transaction and treat the income as yours.

To escape this nasty piece of legislation, you need to make sure you plan and organise your affairs the proper way. Certain things work and others don’t.

For example, outright gifts might work. But, their presence might not be enough to steer you away from trouble. As the taxman has made it clear in the following statement: -

“it is essential to look at the whole arrangement. This could include a series of transactions, some of which may be commecial or involve outrright gifts between spouses and some others not. If the overall effect of the whole arrangement is to transfer income from one individual to another, the settlements legislation is likely to apply”.

Effectively the above stance of the Revenue is a “catch-all” attempt by the taxman directed towards scaring people from planning their tax affairs in a more tax-efficient way for them.

To sum it up, you can reduce the risk of being caught and stay on the safe side by ensuring that:
• Do not re-allocate income without any corresponding quid prop quo,

• People are getting rewarded in proportion to their contribution in the business,
• Any arrangements are on a commercial basis i.e. not only rewards but also risks of ownership are transferred.

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