Private Medical Practice - Husband and Wife Arrangements

Given the variety of benefits associated with providing private medical services via a limited company, we are often asked to advise on the most suitable shareholding structure for such a business. It is common for a doctor to form the company in ownership with his or her spouse, quite often with the spouse providing admin and strategic input to the running of the business.

Given that dividends (distributions of company profit) are paid to shareholders on the ratio that shares are held, it is crucial that the shareholding structure is carefully considered. If one spouse is a significantly lower earner than their partner, it is likely that they will pay a lower rate of tax on the dividends received from the medical company. For example, Dr Walsh, who has a full time NHS employment contract, will pay a higher rate of tax than his wife Mrs Walsh who has a relatively small salary for her work at a local bank. With this difference in tax rates, clearly there is an advantage to allocating a proportion of the shares to Mrs Walsh. The question is, could Mrs Walsh subscrible to say 40% of the share capital and be fully entitled to the dividend distributions?

The well publicised tax case, Garnett v Jones (re Arctic Systems Ltd) [2007] STC 1536, certainly suggests that Mrs Walsh could reasonably subscribe to 40% of the Ordinary Share Capital without subsequent dividend distributions being redirected to Dr Walsh for tax purposes. The House of Lords concluded that an Ordinary Share was more than just a ‘right to income’ as in fact it comprised a handful of rights including the right to participate in a capital distribution and a right to vote at shareholder meetings. With these findings in mind, it is now widely accepted that dividend distributions should be taxed on the recipient and not redirected to the ‘main fee earner’, in this case, Dr Walsh.

In conclusion, when deciding upon the shareholding structure of a family owned medical company, the potential shareholders should consider the rights that share ownership provides and the rates of tax payable by each subscriber.