Giving a share of your business to your spouse can reduce the tax bill on its profits. Alternatively, you could sell part of the business to them which can save even more tax. How’s it done?
Family (tax) planning
Owning your company jointly with your spouse, rather than on your own, 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.
Never too late to make the change
Your spouse might not have been made a shareholder when you formed your company. The good news is that this doesn’t prevent you from improving 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.
Not a gift, it’s a sale
The usual advice given by tax experts when executing this type of tax-saving plan 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. John started his company, Acom Ltd, from scratch ten years ago. It’s done well and is now valued at £600,000. Acom pays John £100,000 per year in dividends on which nearly £50,000 is taxed at the higher rate. His wife Janet has only modest income. To make use of her tax-free allowances and basic rate band to reduce the tax bill on the dividends, John’s accountant advises him to give half of his shares to Janet.
Tax relief on interest. John and Janet have a £200,000 mortgage on their home and the interest they pay on the loan is around £11,000 per year. There’s no tax relief on loans used to buy your home but there is for loans to buy shares in a company subject to conditions. This gives John’s accountant a tax-saving idea.
Tip. If John sells instead of giving shares to Janet, any money she borrows to fund the purchase will qualify for tax relief.
Loan exchange. John sells half his shares to Janet at a discounted price of say, £100,000. Janet takes a loan on similar terms to the mortgage (this could even be a mortgage extension) to pay John. He then uses the money to repay £100,000 of the mortgage.
Extra tax relief
The effect of the arrangement is that between them John and Janet have swapped £100,000 of their home mortgage for £100,000 to purchase shares in Acom Ltd. Because interest on the latter is a qualifying loan, the interest paid on it, around £5,500 per year, now qualifies for tax relief. This will knock £1,100 off their tax bill.
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.