For many years the typical way for a higher rate tax payer to cut the amount of tax they pay on their personal income has been to transfer shares in their company to their spouse who, for example, may be a non or lower rate tax payer. With many owner managed businesses remunerating the owners through a combination of low salary and dividends this has historically meant paying little to no tax on around the first £80,000 (approx.) for a married couple (or civil partners). This has of course become more important following the changes to the dividend tax regime from 6th April 2016.
It should come as no surprise therefore to learn that HM Revenue & Customs have consistently tried to deter and stop this "income shifting" over the years. Many of you will no doubt be familiar with the machinations of the Arctic Systems case. However, so far, not much has changed and no new laws have been introduced to tackle income shifting. So if you are considering transferring shares to your spouse as a way to mitigate your personal tax exposure, you may conclude and decide to go ahead with this plan.
BUT WAIT! Read on and explore an even smarter way for you and your spouse (or civil partner) to minimise your joint tax bill.
Selling company shares?
Rather than transferring the shares, your spouse (or civil partner) could in fact buy those same shares from you. How would you fund this, I hear you ask? Well, you could refinance the mortgage on your home and your partner would use the resulting loan to buy shares from you. When you receive the money from your partner, you can use this to repay some of the original mortgage.
So far so good right? Well, there's more, the interest that you would have paid on the original mortgage would not have been eligible for tax relief, whereas the interest on the new loan (which your spouse used for the purchase of shares from you) is eligible for relief against tax.
All of which makes the process of buying shares more tax efficient – you can align income between you and your partner to help mitigate your joint tax bill, and you can claim tax relief on your interest payments! You would even be exempt from paying capital gains tax from selling the shares because the sale took place between you and your spouse (or civil partner).
Of course, nothing is easy and for this to work successfully, there are conditions that you would need to meet and hoops you would need to jump through. Of course, I would say that, I'm a tax adviser aren't I? In all seriousness though, as with most things we can do a DIY job, but would you (like Leonid Rogozov) remove your own appendix?
