Transferring Shares To Your Spouse

It has to be done the right way ...

POSTED BY HELEN BEAUMONT ON 02/02/2018 @ 8:00AM

I am often asked by owner-managed companies, whether it makes sense to have some of the shares owned by their spouse. For tax purposes, the answer is mostly yes, but there are some non-tax reasons why it may not be a good idea ...

Transferring shares to your spouse can have tax benefits, but it needs to be done in the right way!

Under previous rules (pre 6 April 2016), owner-managers were able to pay ‘tax-free’ dividends to their spouses (or civil partner) of around £35,000 (if we assume they had no other taxable income).

"Because if the spouse did not work in the company, it was not possible to justify any salary!"

However, since 2016/17, this has changed with the abolition of the 10% dividend tax credit and the introduction of a 7.5% (basic rate) charge on dividend income. However, this does not mean that spousal dividend planning is dead.

To quote a couple of examples:

a (non-taxpaying) spouse can take a tax-free dividend of £16,500 in 2017/18 (equal to the combined personal allowance (£11,500) and £5,000 dividend allowance).
and it is possible for a spouse to receive a dividend of (say) £45,000 at an income tax cost of a little over £2,000 – an effective rate of 4.5%.

There is a potential for HMRC to challenge any dividends paid to your spouse and this was highlighted in the Arctic Systems case where HMRC argued that it was tax avoidance by passing dividends to the spouse when the owner-manager was obviously going to benefit.

"To provide dividend income for spouses, ensure the shares are transferred or issued to them in a robust manner that avoids any challenge from HMRC!"

The decision in Arctic Systems tells us that such arrangements, which will generally confer bounty on the recipient spouse, will constitute a 'settlement'. This is because the spouse would acquire the shares on very beneficial terms with the practical certainty that they would produce future dividends (with the underlying company profits being generated by, in this case, her husband).

Where such arrangements are caught by the settlement rules, the relevant dividend income would be treated as the settlor’s income, which would nullify the tax benefits.

Spousal dividend planning requires careful implementation so if you are thinking of transferring shares to your spouse and don't want to be scrutinised by HMRC then it is worth talking to a tax advisor to ensure the transfer is done properly.

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Until next time ...

HELEN BEAUMONT