Transferring income-producing assets to your spouse or civil partner can reduce the overall income tax bill. However, can you make it even more tax efficient?
Sharing company profitsWe recently explained how you can improve tax efficiency by reorganising the share capital in your company by transferring a stake in it to your spouse or civil partner. In this article we look at a further tax break you might be able to take advantage of as part of the arrangement.
Normal tax planning
The usual tax advice is to gift the shares. This has the advantage of simplicity and doesn’t trigger any of the nasty capital gains tax avoidance rules that can apply where you give away shares to someone other than your spouse or civil partner, i.e. deeming the transaction as if it were a sale made at the market value of the shares. There’s certainly nothing wrong with this but you could be missing out on additional tax savings. Tip. If you and your spouse/civil partner have a mortgage on your home, instead of giving shares to your spouse sell them at a price up to their market value.
Why sell?
Our tip exploits the rules which allow tax relief for interest paid on qualifying loans by substituting part of your mortgage, which is non-qualifying, for a loan, to purchase shares in a trading company, which is a qualifying one. The result is some of the interest paid on the loan used to buy or improve your home becomes tax deductible.
Conditions
For the scheme to work several conditions must be met. The main ones are:
- your company must be a trading company, i.e. its business must not mainly consist of holding investments
- you must sell at least 5% of the company’s total ordinary shares
- the sale price of the shares shouldn’t be more than the market value, i.e. what you would get if you sold them to a buyer who had no connection to your company.
Four steps to save tax
The first step is to value the shares you’re transferring to your spouse/civil partner. This sets the maximum price that they should pay you.
The second step is to extend your mortgage or take out a bridging loan for an amount equal to the value of the shares (or for a lesser amount if it’s not possible to borrow up to that level).
The third step is for your spouse/civil partner to use the new borrowing to buy shares from you. You now have more money in your bank account and your spouse/civil partner owns the shares.
Step four is for you to use the share sale money to repay part of your original mortgage. You have now substituted part of the non-qualifying loan to buy your home with a qualifying loan to purchase shares in your company.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.