Where an individual takes out a loan to buy shares in a ‘close’ company (a close company is essentially one with no more than five shareholders), any interest they suffer on the loan can be offset against their personal income, therefore reducing their taxable income. In other words, they will get tax relief on the loan interest. The company they’re buying the shares in needs to be a trading company rather than an investment company, and the investor then needs to work in the business for the majority of their time.
Are you planning on buying shares in a close company, or have you already done so? If you can answer ‘yes’ to either of these questions, be sure to let EBA know if you have taken out a loan to provide you with the funds to buy the shares, as we’ll be able to claim tax relief on the interest for you.
This brings me to an interesting point.
As many of you know, 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. Instead of simply gifting the shares to her, my ‘interesting’ plan involves him selling 50% of his company to her – and charging her for it! But, where does Mrs Smith get the money from to pay for the shares?
Let’s assume that 50% of his company is worth £200k. Mrs. Smith then borrows £200k and uses the money to pay her husband. Mr. Smith banks the £200k and then uses it to pay £200k off personal debts which are incurring interest (loans, etc.). So, at this point, their combined borrowings are the same as they were before the transaction – albeit that there’s now a separate loan in Mrs. Smith’s name and less debt for Mr. Smith. 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. Interest on Mr. Smith’s £200 of debts wouldn’t have qualified for tax relief (the one exception would have been if Mr. Smith’s debts had related to buy-to-let properties, but let’s assume not).
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. As she’s be able to deduct the £20k of interest from her total income when preparing her tax return, 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 there’s no CGT liability.
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 interest rate on Mr. Smith’s current debts 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.
