Is share transfer allowed?
Yes, it is! You may remember HMRC losing a court battle with Arctic Systems a few years ago over income shifting between husband and wife. And even though there were hints that HMRC would introduce new legislation to remove the tax advantage that share transfer to a spouse offers, it hasn’t happened yet.
Share transfer is a useful (and often under utilised) feature of any tax planning toolkit. However, the correct circumstances must exist before it can be done.
How it works
If you’re a higher rate tax payer who runs your own business and your spouse is a lower rate taxpayer then shifting some of your income to them will result in a lower combined tax bill.
The simplest way to do this is by transferring some of the shares that you have in your business to your spouse; almost like gifting the shares to them, without any money physically changing hands.
It’s important to plan the number of shares that you would like to transfer, this will help make the share transfer process as tax efficient as possible. You should base this on how much income you would like to shift now and in years to come.
The benefit comes when your company is paying out dividends, as your spouse would pay dividend tax at a lower rate than you would have done if the dividend had been paid to you instead. That is assuming that they don’t go over the income threshold for that tax year.
Got a mortgage? Then there’s another way
If you want to be even more tax efficient, you can sell the shares to your spouse. However, this only works if you have a mortgage on your home.
Tax relief for interest paid on home mortgages isn’t allowed and hasn’t been for a long time. However, if you can meet the conditions below interest on loans to purchase shares in a company does qualify:
• The business must be a trading company,
• At least 5% of the company’s total ordinary shares
• The share sale price shouldn’t be more than their market value.
Putting the plan into action
So if your spouse can meet the conditions above, and you have the scope to remortgage, tax relief can be claimed up to the highest current tax rate of 45%.
The first step is to secure the borrowings against your property. The next step is for your spouse to use the funds to purchase shares from you, then physically transfer the money to your account. And the final step is for you to use the transferred funds to repay part of your mortgage. Doing this gives you a tax-qualifying loan to buy shares in your company.
Capital gains tax (CGT) bonus
A bonus is that because of the special rules that exist for transactions between spouses, you won’t pay CGT on the shares even if you sold them for more than they cost you.
If you’d like to find out more about using share transfer to improve your tax position call Stephen Usher on 0141 345 2355 or email firstname.lastname@example.org