It is definitely worth splitting company shares with either your spouse or civil partner, but make sure your limited company is a suitable structure for you to do so. With an owner-managed limited company, the owner should either:
- Issue a number of shares to their spouse
- Make her or him an officer of the company in some other capacity
- Put her or his spouse on the payroll
It maybe more favourable if the spouse takes on a role in the business that is legitimately required.
Your spouse can be paid by the company either at a nominal salary below the taxable threshold or through dividend payments. Providing this structure is evident, that your spouse has no other income from other work, potentially, you can make use of the non-working spouse’s tax-free allowance and lower rate tax threshold.
While splitting your income – “income-shifting” – in this way can reduce your overall tax burden, remember that HMRC do not favour splitting income and are keen to crack down on what has been described as “systemic tax avoidance by contracting couples”. That is why the 1930s legislation S660 was resurrected and then replaced in 2005 by Section 624 of the Income Tax (Trading and Other Income) Act (ITTOIA). This states that if either the spouse or owner makes a “settlement”, it should still be treated as being taxed at the original rate, which is exactly what you want to avoid.
HMRC, therefore, tends to show more interest in businesses where both spouses are owners (as shareholders or partners) but one spouse is considerably less active in the business than the other; and if a “settlement” is proven the income of the lower taxpayer is taxed as income of the donor of the gift (the settlor).
What is the ideal scenario for splitting shares with your spouse?
A company where both you and your spouse hold equal shares in the company means that you can both take dividends and pay less tax. Providing this is properly managed from the beginning, there should be no problems.
Your spouse can play an active role in the company; by taking a role that the company requires, such as bookkeeping, cleaning, data input, or in any capacity for which the company might employ someone. Providing the work carried out by your spouse or civil partner is a legitimate role within the company then they can be paid wages for their work by the company. As a shareholder they will still be entitled to dividends from the company profits.
Prevent any wrangling by doing it correctly from the start
- Ideally, both spouses will subscribe for shares on formation of the company and the main shareholder will be director from the outset;
- Ensure that all shares carry voting and capital distribution rights;
- It will be better for the Director to receive director’s fees rather than salary as an employee, particularly if this is evidenced by a commercial agreement; and the other spouse if playing an active role in the company can draw a salary as an employee;
- Both spouses receive dividends in proportion to share capital;
- Have the “non-earning” spouse employed usefully in the business so that the company receives good value for money;
- A company with substantial assets, which generate income, or retained profits, is less likely to get caught out;
So the answer as to whether it is worth splitting company shares with your spouse is, yes, so long as you make sure all the elements are properly organised as suggested. Like many things, success is in the planning. Another subject that may interest you in relation to: 10 Top Tips about the New Dividend Tax