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Splitting dividends between spouses has long been considered a sensible and effective tax planning strategy for family-run businesses. However, this approach was nearly brought to an end following one of the most significant tax cases in recent UK history: the Arctic Systems case.
The Background: A Straightforward Setup—Or So It Seemed
Geoff Jones operated a company called Arctic Systems Ltd. His wife, Diana, held shares in the business and received dividends accordingly. Because Diana was a basic-rate taxpayer, the couple reduced their overall tax liability by shifting a portion of the company’s profits to her.
From a legal and business perspective, this arrangement appeared entirely legitimate. But HMRC took a very different view.
HMRC’s Challenge: Income Shifting Allegations
HMRC contended that Geoff was the individual generating the company’s income and that the dividends paid to Diana were a form of income shifting—that is, transferring income to a lower-taxed spouse purely to reduce tax. They argued that the income should be taxed as if it were entirely Geoff’s.
This was more than just a dispute about one couple’s tax affairs; the case had implications for thousands of family-owned businesses across the UK.
The Court’s Ruling: A Landmark Decision
The case eventually reached the House of Lords, which ruled in favour of the Joneses. The court concluded:
- Both spouses legally owned their shares.
- Dividends were paid because they were shareholders, not as disguised remuneration.
- The arrangement constituted legitimate tax planning, not tax avoidance.
This was a landmark victory for family business owners across the country, affirming that income from jointly owned businesses could be shared legitimately.
HMRC’s Response: A Change in Tactics
Despite the court’s ruling, HMRC did not stop there. In the years following the case, the tax authority introduced several measures to restrict the perceived abuse of dividend arrangements:
- The dividend tax allowance has been significantly reduced, falling to just £500 from April 2024.
- HMRC now pays closer attention to the role of non-working spouses. If a spouse is not actively involved in the business, HMRC may challenge the legitimacy of dividend payments made to them.
- Many businesses are now exploring alternative structures such as Family Investment Companies (FICs) to achieve similar tax efficiencies under the new rules.
The Current Position: Is Dividend Splitting Still Viable?
The short answer is yes, but it is no longer as straightforward as it once was. While it is still possible to split dividends between spouses, doing so requires careful consideration of both share ownership and the roles played within the business.
Incorrectly structured arrangements may lead to HMRC challenging the setup, resulting in reclassification of income and unexpected tax liabilities.
How We Can Help at Black & White Accounting
At Black & White Accounting, we work closely with family-run businesses to ensure their tax planning is both effective and compliant. We can help you:
- Structure your dividend payments appropriately to maximise tax efficiency while remaining within HMRC guidelines.
- Stay up to date with changes to tax legislation and dividend allowances.
- Explore alternative strategies that go beyond dividends, such as the use of Family Investment Companies and other legitimate planning tools.
If you operate a business with your spouse, it is essential to ensure that your tax planning reflects current legislation and best practices.
Contact Black & White Accounting today to discuss how we can help you protect your business and minimise your tax exposure—confidently and compliantly.
