Author: Simon Warne, Partner, Private Clients.
Sharing dividend income between a married couple can achieve a useful annual household tax saving. This practice is particularly effective in a family business where one party in the marriage owns all the shares.
An entrepreneur, wanting to minimise their tax liability, may opt to take a modest wage, typically at the current nil rate level of £8,700. Additional income would then be extracted by way of dividends which are more tax efficient. As the business becomes more successful and the individual becomes a higher rate taxpayer, the overall tax liability can be reduced if, for example, a non-tax paying spouse is brought into the equation.
A married couple could save £12,500 annually if the shareholder receives a dividend of £100,000. Without planning £50,000 of income may be liable for tax at the upper rate, which for dividends is 32.5%. By splitting the dividend between the couple this income could be taxed at the much lower 'dividend ordinary' rate of 7.5%, potentially saving 25% of £50,000. In fact, the savings will be slightly greater as the first £2,000 of dividends are not taxable. For dividend income above £100,000, the savings are higher where abatement of personal allowances can be reduced or prevented.
Transfers of shares between spouses who live together are generally tax-free. The recipient will be taxed on the dividend income once beneficial ownership of the shares has been arranged. For other transfers, specific advice should be taken.
A number of factors must be considered to ensure that HMRC will not seek to tax the income from the transferred shares back to the donor spouse. As well as ensuring any transfers are made in accordance with the company's Articles, key considerations include an assessment of the shares themselves and the state of the marriage.
If the company is ever sold, then splitting the shareholding can affect future capital gains. The prospect of utilising two annual capital gains tax exemptions sounds potentially attractive – but, if the value of the shares is considerable, then the parties should take specialist tax advice.
Key tax reliefs could be adversely affected and some pre-sale tax planning may be in order.
For more information on the issues addressed in this article or to discuss your circumstances, get in touch with Simon Warne or your usual Crowe contact.