Making your spouse (or civil partner) a shareholder of your limited company

Why is it beneficial to appoint your spouse (or civil partner) as a shareholder of your limited company?

Well, it’s a question definitely worth asking and here, exclusively for Free-Work, I’ll explore this important but often overlooked arrangement; the good, the bad and the to-be-careful about, writes Matt Fryer, managing director of Brookson.

Top reasons to make your spouse/civil partner a company shareholder

There are three key reasons to consider appointing your spouse or civil partner as a shareholder of your limited company:

1. Dividend income - you can provide him/her with dividends from company earnings.

2. Tax benefits - by adding a shareholder, (particularly if the spouse/civil partner is in a lower tax bracket to yourself), you can take advantage of the tax savings of having another shareholder.

3. Business continuity - if something should happen to you, then a spouse can step in to help keep the company running.

Dividend income and other rights

As well as paying dividends to your spouse/civil partner from your company, it is important to note that their share should entitle him/her to full voting rights and rights to assets on winding up (capital distribution – we discuss this further below).

Tax benefits of appointing your spouse as a shareholder in your company

The tax benefits in respect of appointing your spouse are best demonstrated as follows, based on 2023/24 tax rates and thresholds.

In this example, we have assumed that a husband and wife each have one share – therefore, if the director is looking to pay a dividend of £50,000, the payment to each is £25,000 as each owns 50% of shareholdings.

If the spouse is a basic rate taxpayer, then the £25,000 is taxed at the basic rate of 8.75%, the tax would be £2,187.50. If that dividend was taxed at the higher rate of 33.75%, the tax would be £8,437.50, which is a hefty difference of £6,250!

What about using your company to pay a spouse/civil partner a salary?

If your spouse or civil partner has no other income, you may also wish to consider paying them a basic salary in your company, thereby utilising their personal allowance. The company would also benefit from corporation tax relief on the same.

However, if he/she is fully employed elsewhere, then there is limited scope about any tax planning benefits discussed above.

Are there any tax and HMRC issues to be aware of?

HM Revenue & Customs does not allow you to divert personal income (such as dividends) to an individual to save tax. This is known in HMRC terminology as “income shifting.”

In practice, gifting shares to a family member, to pay a lower rate of tax, would be caught by the tax authority’s “Settlements Legislation” -- found under ITTOIA /624, particularly, if it was not a commercial or an ‘arms-length’ transaction.

These HMRC rules also apply concerning gifts to spouses which are ‘wholly’ or ‘substantially’ a right to income. But crucially, a ‘spousal exemption’ exists, if all the conditions are met.

Settlements Legislation and Arctic Systems: demystified

The court case of a husband-and-wife company, Arctic Systems Limited, highlighted this issue and concerned a Geoff Jones and Diana Jones who were both receiving dividends as 50:50 shareholders in a company.

The husband generated the company’s income, and the wife carried out administrative work.

The issue for HMRC was that the husband only took a small salary in the relevant year, which was way below a commercial salary for a consultant like him. As a result, dividend levels were high, with half subsequently being distributed to his wife. By taking the lower salary and distributing income to another person who was not generating the profits, HMRC said, a ‘settlement’ had been created and therefore the wife’s income should be taxed as the husband’s.

But HMRC lost this case. The shareholders successfully deployed the spousal exemption clause which only catches gifts between spouses (or civil partners) which are “wholly or substantially a right to income.” As the spouse was an equal shareholder with equal voting rights, what she received was not purely a gift of income; the income matched her underlying shares, which carried all the same responsibilities.

But there’s no room for complacency in these complex matters! In fact, if you’re considering making your spouse or civil partner a shareholder in your limited company, you should strongly consider consulting a reputable (and experienced) accountant, before you take action. You must also be aware of:

The importance of having the correct paperwork in place

As outlined above, the spousal share must have full share rights. Shares allotted should be recorded in the shareholder’s register, documented in a written resolution and supported by a share certificate as evidence of ownership.

Best-practice dictates dividend payments to the spouse to be made directly to him/her via their own personal bank account -- this establishes their full rights to the same.

It is also important to issue dividend vouchers contemporaneously to support the dividend payments made.

We would also advocate not changing the shareholdings frequently if a spouse’s income changes year-on-year -- this could give rise to interest from HMRC and they could potentially argue you are looking to take an unfair tax advantage in this respect.

Our advice? Decide on your share allotment initially and retain the same percentage going forward for consistency.

Final considerations

As well as income extraction /tax planning benefits with appointing a spouse as a shareholder, there are practical benefits -- for instance, in the event you become ill, or worse, your spouse could step in.

You should also be aware that you are giving away a part of your company. In reality, if your personal circumstances changed and you were to separate or divorce, then your now ‘ex-spouse’ would have a share in the value of your company in this respect.

To reiterate, we would always advocate speaking to an accountancy adviser in respect of your company tax planning, to ensure you are fully aware of the benefits and risks of making your spouse a shareholder in your limited company.