SELL, DON’T GIFT: HOW TO SIGNIFICANTLY REDUCE YOUR TAX BILL BY SELLING SHARES TO YOUR PARTNER
Looking to become more tax efficient this year? Gifting shares of your business to your
spouse is often recommended by small business accountants and tax advisors. This is to
make use of both yours and your partner’s tax-free allowances, and ultimately minimise the tax
on dividends the company pays. This is a great move to be tax efficient, however if you’re looking for
ways to save even more and you also happen to have a mortgage, your accounting firm may
not have told you to consider selling shares instead of gifting them. Here’s what you need to
- Firstly, why is joint ownership best?
Instead of owning your business alone, it is widely considered good practice to own it jointly
with your spouse whenever one of you is paying a higher rate of tax than the other. When
you both own shares in the company, you are both entitled to use your tax-free allowances,
dividend nil rate band, and other rate bands, in order to reduce the tax paid on your
company dividends. Owning with your partner is a great way to become more tax efficient.
- Should I have made my spouse a shareholder when I formed the company?
If you’re thinking it’s too late to make your spouse a shareholder in your company, it’s
definitely not. Even if your spouse was not made a shareholder in the beginning, HMRC will
still allow you to transfer ordinary shares to them as a gift in order to reduce your tax bill. No
matter how long ago you have incorporated your company, you can still make your spouse
a shareholder at any time.
- How does this help reduce my tax bill?
Here’s an example of this tax-saving plan in action:
Joe started his company (Joe Bloggs Ltd.) over ten years ago. It has grown considerably
since then, and is now being valued at around £600,000. Joe Bloggs Ltd. pays Joe £100,000
per year in dividends, of which almost £50,000 is taxed at the higher rate, and naturally, Joe
would like to save on tax wherever possible.
Joe’s wife, Jane, brings in less income, and so Joe’s accountant suggests that he gift half of
the shares of Joe Bloggs Ltd. to Jane, in order to utilise the most of her tax-free allowances
and basic rate band.
- So why is it better to sell and not gift the shares?
Here’s where it gets interesting. Typically, tax experts will advise you to gift the shares to
your spouse to save, which is acceptable. However, if you are currently paying off a
mortgage on your home, it may be more tax efficient for you to sell the shares to them at a
reduced rate instead. Selling the shares allows you to structure the transaction in such a way
that you receive tax relief on the interest you pay.
- How does this work?
Let’s say Joe and Jane have a mortgage of £200,000 on their home, and the interest they
pay on this loan is around £11,000 each year. Tax relief does not apply to loans used to buy
your home, but it often does when you are buying shares in a company (note: conditions
If Joe sells shares to Jane for a discounted rate (we’ll use £100,000 as an example) instead
of gifting them to her, the loan that Jane takes out to make this purchase will then qualify for
tax relief. They can then use this money to pay back £100,000 of their mortgage.
In doing so, Joe and Jane have effectively switched the £100,000 payment to pay towards
their home mortgage instead of the sale of shares in the company. The interest from the
money that goes towards the sale of shares qualifies for tax relief, meaning the interest paid
is around £5,500 per year, and around £1,100 of this gets knocked off their tax bill.
If you believe you could qualify for tax relief by implementing the plan above, you can discover the savings you could make in your business by getting in touch by emailing us to firstname.lastname@example.org or call us 020 3735 5119 at Price & Accountants to discuss how we can help you save on your tax this year.
We are committed to helping small businesses in London and around the UK with their accounting needs, using Xero online accounting software and our expert team of advisors, all dedicated to helping your business flourish.
Rahamut Bhuiyan (Author)View Post