Don’t give your shares to your spouse – sell to them!

It may be beneficial to include your spouse as a shareholder in your company, allowing each of you to take dividends from the company and to utilise your basic rate tax bands.

Traditionally, one spouse would simply gift their shares to the other, with no capital gain tax (CGT) implications due to the inter-spouse exemption rules; but there may be another way to do this that could bring further tax relief.

Let’s assume that Mr. Smith owns 100% of a company and that he wants to bring Mrs. Smith in as a 50% shareholder. This plan involves him selling 50% of his company to her – and charging her for it! Let’s assume that 50% of his company is worth £200k. Mrs. Smith borrows £200k and uses the money to pay her husband. Mr. Smith banks the £200k and then uses the money to pay £200k off the mortgage on the family home. So, at this point, their combined borrowings are the same as they were before the transaction – albeit that there’s now a separate loan and a lower outstanding mortgage.

The key point here is that the interest on Mrs. Smith’s £200k loan qualifies for tax relief against her income because it’s interest on a loan used to buy shares. So, let’s assume Mrs. Smith is a higher rate taxpayer and that she takes dividends from the company after receiving her shares. Assuming an interest rate of say 10%, the annual interest on the £200k loan would be £20k. She could now take an additional £20k of dividend income from the company and pay only 8.75% tax rather than 33.75%. That’s a saving of 25% or £5,000 per annum.

Importantly, there’s no CGT for Mr. Smith to pay on the £200k sale of shares because he’s selling to his wife – so it’s exempt from CGT.

It’s a cunning and nifty solution, although I do appreciate that the interest rate on the new loan has to be considered – if it’s higher than the current mortgage rate then this could reduce or eliminate the benefit. Nevertheless, it’s food for thought and could be worth considering as long as the conditions are right.

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David Elliott
David Elliott

Chartered Accountant, BSC, FCA

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