Transferring Shares in Family Company to Spouse – Gift or Sale?
By Simon Denye, Partner, Dow Schofield Watts Tax Consulting LLP
Owning your company jointly with your spouse is standard planning where one of you pays tax at a higher rate than the other (or one of you pays no tax at all). The idea is that by both owning shares you can each use your tax-free allowances, dividend nil rate band and other rate bands to minimise tax on dividends the company pays.
You can improve tax efficiency by later transferring shares to them. Provided they are ordinary shares HMRC will accept a gift of shares between you to reduce your overall tax bill
Gift or Sale?
The usual advice is for you to make the transfer of shares a gift. That’s OK, but if you’re a homeowner with a mortgage, selling the shares to your spouse might be a better option as it’s possible to structure the transaction to generate tax relief on the interest you pay that wouldn’t otherwise be available. The following example illustrates how this can work.
Example. Family company is now valued at £600,000. It pays Mr A £100,000 per year in dividends on which nearly £50,000 is taxed at the higher rate. His wife, Mrs A, has only modest income. To make use of her tax-free allowances and basic rate band to reduce the tax bill on the dividends, it makes sense for half of the shares to be in Mrs A’s name.
Tax relief on interest via loan exchange
Mr and Mrs A have a £200k mortgage on their home and the interest they pay on the loan is say £10k pa. There’s no tax relief on loans used to buy their home but there is for loans to buy shares in a company (subject to conditions).
If Mr A sells instead of giving shares to Mrs A, any money she borrows to fund the purchase will qualify for tax relief. Therefore, Mrs A takes a loan out and Mr A uses this to repay mortgage. Borrowing left qualifies for interest relief.
Simon is a Partner in Dow Schofield Watts Tax Consulting LLP. He has over 21 years’ experience providing advice to a wide range of clients including large corporates, SMEs and high net worth individuals.