
WE CHERISH OUR partners for a multitude of reasons, yet tax planning rarely ranks among the top. Nevertheless, in light of the unprecedented tax burden faced by taxpayers today, planning with shares and spouses can be a valuable tool for both individuals and businesses to manage their tax liabilities effectively.
In today’s Shipleys Tax article, we explore some of the basic considerations for tax planning with shares and spouses and the traps that one should avoid.
Shares and Spouses
One of the most common tax planning strategies involving shares and spouses is the transfer of shares between spouses. This can be done to take advantage of lower tax rates or to transfer ownership of a company or business. By utilising tax free allowances by paying a spouse a small salary, usually up to the primary threshold, so as to incur no PAYE or NICs but still maintain entitlement to state benefits and the state pension. The company gets corporation tax relief on the salaries, and earnings are then topped up by dividends.
However, it is essential to understand the tax implications of such transfers and to ensure that they are done correctly.
One of the most common tax planning strategies involving shares and spouses is the transfer of shares between spouses
Firstly, when transferring shares between spouses, it is important to consider the capital gains tax (CGT) implications. In the UK, CGT is a tax on the profits made from selling assets, including shares. The current CGT allowance for individuals is £12,300 for the tax year 2022/23. However, when transferring shares between spouses, the transfer is not subject to CGT. Instead, the transfer is deemed to take place at market value, and the new owner of the shares takes on the original cost of the shares for future CGT calculations.
Secondly, it is important to consider the income tax implications of transferring shares between spouses. Dividends from shares are subject to income tax, and if a higher-earning spouse transfers shares to a lower-earning spouse, they may be able to take advantage of the lower tax rates. However, there are rules in place to prevent spouses from using this strategy to avoid tax. The so-called “settlements legislation” applies to situations where income is transferred between spouses in order to take advantage of lower tax rates. In such cases, the income will be taxed as if it had been earned by the higher-earning spouse.
The Traps to Avoid
When it comes to tax planning with shares and spouses, there are several traps that individuals must avoid. These include:
- Failing to properly document the transfer of shares between spouses – It is essential to document any transfers of shares between spouses to ensure that the transfer is valid and to avoid any disputes with HMRC.
- Failing to consider the long-term implications of the transfer – Transferring shares between spouses can have long-term implications, such as future CGT liabilities, and individuals must consider these implications before making any transfers.
- Failing to comply with the rules on settlements – The settlements legislation can be complex, and individuals must ensure that they comply with the rules to avoid being subject to additional tax liabilities.
Dividends from shares are subject to income tax, and if a higher-earning spouse transfers shares to a lower-earning spouse, they may be able to take advantage of the lower tax rates
- Alphabet share schemes – companies may issue so-called “Alphabet shares” to spouses, which restrict shareholders voting rights, and/or their right of income to dividends, or capital on a winding up, based on performance or some other metric. Gifting or issuing such shares to such key individuals could be argued by HMRC to be “substantially a right to income”, and therefore would fall foul of settlements legislation above.
If however such shares issued under a carefully drafted alphabet share scheme, have equal and full minority voting rights applied, then broadly HMRC would not be able to attack this arrangement as a “settlement”, as always there are exceptions to this however and it is best to take professional advice.
Conclusion
Tax planning with shares and spouses can be a valuable tool for managing tax liabilities effectively. However, individuals must be aware of the potential traps and pitfalls that can arise when using this strategy. By properly documenting any transfers of shares, considering the long-term implications of the transfer, and complying with the rules on settlements, individuals can avoid these traps and ensure that their tax planning strategies are effective and compliant with tax rules.
If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.
Please note that Shipleys Tax do not give free advice by email or telephone.