Where a company director buys or leases a company car and provides it to a spouse, HMRC will tax the benefit in kind on the director – not the spouse. In fact, the same would apply if the director provided a company car to any other family member (e.g. son or daughter). Now comes the interesting bit. What if our director and spouse were to get divorced and if, as part of the settlement, the spouse ceased to be a shareholder in the family company?
You’d have thought that either the car benefit would continue be taxed on the director (in other words, no change) or on the spouse. Well, neither of these things happens!
The spouse can continue to drive the company car without being taxed on it because you can’t be taxed on benefits in kind unless either you’re an employee or you have a material shareholding in the company providing the benefit. The provision of the car would count as a gift and escape a benefit in kind charge.
There is one downside, which is that the company would no longer be able to claim tax relief on the car, as it would now be a gift. However, there would no longer be any class 1A national insurance for the company to pay on the car (as it’s no longer a benefit in kind) and the director wouldn’t have to draw additional income from the company (and potentially incur an income tax charge in doing so) in order to obtain the personal funds to pay for the provision of the car to the ex-spouse.
It’s not just company cars that the above applies to, either. Private medical insurance is another common benefit in kind which could also be provided by the company, post-divorce. The important point to note is that the benefit must have been provided before the divorce and before the spouse’s exit from the business. This way, HMRC couldn’t argue under GAAR (the General Anti Abuse Rule) that the arrangement had been made to avoid tax, as it would simply be the continuation of an arrangement already in place. The same would apply if, for example, the director had employed the son/daughter and provided them with a company car, but the son/daughter then leaves the business.
