Can I transfer shares to my spouse to reduce our tax bill?

Frank Nash

Can I transfer shares to my spouse to reduce our tax bill?

Q: I own shares in a private company that I have held for 15 years. They sit outside any wrapper. Dividend income from the shares is somewhat erratic, but can amount to about £10,000 in a tax year and is on an upward trajectory. As a higher-rate taxpayer, would I be able to transfer my shares to my wife who is a basic-rate taxpayer in order to reduce our joint tax bill? Is there an alternative course of action I could take to reduce tax paid on the dividend income and any capital gain I may ultimately make. 

Alan Richmond

Frank Nash at Blick Rothenberg replies: You should tread carefully before transferring any shares in a private company. Unlike traded shares on the stock market, you will be regulated by the private company’s Articles and any Shareholders’ Agreement. These regulate how shares may be disposed of. They may even include a clause requiring you to offer your shares to other shareholders on a first refusal basis before any other transfer. Speak to the company secretary or management first and let them know what you propose to do. They will help you. If there are restrictions these can often be overcome by getting members to agree to the transfer.

For tax purposes, transfers of shares between spouses are generally tax-free. Your wife will be taxable on the dividend income once she beneficially owns the shares. If you wish, the shares could be transferred into joint names and you could make a formal election to HMRC (using Form 17) to be taxed in proportions other than 50:50. The dividends would then be taxed in the proportions you elect that could be 10 per cent/90 per cent in favour of your wife, for example. The advantage of this is that by being joint owners you will both be entitled to receive company information, accounts and to vote at members’ annual general meetings.

Splitting the shareholding between you will enable you to shelter any future capital gain using two annual capital gains tax exemptions if the company is ever sold. However, if the value of the shares is likely to be valuable you may want to consider taking specialist tax advice. 

Shares in trading companies may qualify for 100 per cent relief from inheritance tax on death or on a gift during your lifetime. If inheritance tax worries you, consider making an early gift to your adult children or even into a family trust as this may remove a lot of tax from your estate. These types of gifts normally trigger capital gains tax, but not in the case of shares in trading companies where a special relief is available for a holder of 5 per cent or more. Therefore, you could remove a valuable asset from your estate for Inheritance Tax purposes particularly if you do not need the dividend income.

If the company is likely to be put up for sale in the near future you may want to keep hold of the shares. Entrepreneurs’ Relief is often available on a capital gain reducing the tax rate to 10 per cent but many conditions have to be satisfied. The company must be a trading company and the shares must have been held for at least 12 months before the date of sale. A transfer today could therefore destroy any entitlement to this low tax rate if the company is sold in the next few months. Therefore, seek holistic advice before deciding if there are greater things at stake than the dividend tax saving.  


Subscribe today

Full access for just £3.37 a week:

• Tips and recommendations - to beat the market 
• Portfolio clinic & Mr Bearbull - build a well-planned portfolio 
• Expert tools - track and manage investments effortlessly
• Plus free delivery to your home or office

Subscribe Now