- Churchill Tax
PROFIT EXTRACTION: Sharing Your Company With Your Unmarried Partner
The rules for sharing income from your company with your spouse or civil partner are well known. But, if you’re not legally joined, is there a tax-efficient way to share your income?
Married couples and civil partners
Some years ago HMRC lost a long running fight to prevent married couples/civil partners from sharing a company’s income to reduce their joint tax bill. Despite threats from HMRC that it would ask the government to change the law to prevent such tax saving measures in future, nothing has come of it. That’s good news for couples who have tied the knot but is no help to those who haven’t. While it’s still possible for unmarried couples to save tax by income sharing it can come with other tax costs.
Capital gains issues
If an individual gives their unmarried partner shares in their company it can trigger a capital gains tax (CGT) bill (which it wouldn’t if it were a gift or transfer between married partners).
Example - Part 1
Gareth and Jo have been a couple for ten years during which time Jo set up a successful company. Her income from the company puts her in the higher rate tax bracket. Gareth is a part-time worker whose income never exceeds £10,000 per year and is therefore not liable to income tax. Jo could shift some of her income by transferring ordinary shares in her company to Gareth and paying dividends on them. For CGT purposes the transfer is treated as if Jo sold the shares to Gareth at market value. As the value of the shares has risen since Jo paid for them the increase in value is a taxable gain. However, the transfer might still be worth making.
TIP:
Jo could give away enough of her shares each year so that the resulting capital gain would be less than her annual exemption (£12,300 for 2022/23). This would allow income sharing (see The next step ).
TIP:
If the transfer of shares by Jo resulted in a gain greater than her annual CGT exemption, if the conditions were met business asset disposal relief (BADR) would apply. That would mean the tax rate on gains would be just 10%. This tax might be worth paying if the income tax saving from sharing the company’s income was greater in the long term.
Example - Part 2
Jo owns 100 shares in her company. In March 2023 each share is worth £10,000. Jo transfers ten to Gareth in March 2023 and another ten in late April 2023. This results in a capital gain of just under £100,000 each transfer. After taking account of Jo’s CGT annual exemptions for 2022/23 and 2023/24 she is left with a gain of just under £87,700 for each year. The tax at the BADR rate means Jo owes £17,540 (£87,700 x 2 years x 10%). Gareth now owns 20% of the ordinary shares in the company. It pays him dividends of £30,000 per year. He’ll owe tax on this of just £2,450 (£2,000 at 0% plus £28,000 at 8.75%) compared to £11,805 (£30,000 x 39.35%). This means that after just two years Jo and Gareth have saved £18,710 income tax. That’s already greater than the CGT cost of the share transfer.
TIP:
If your company’s business is growing, and therefore its value along with it, the earlier you transfer shares to your unmarried partner the better. This means the share value and corresponding CGT bill will be lower than if the transfer is delayed.
Conclusion
If your partner is in a lower tax bracket than you it’s possible to save income tax by transferring some shares in your company so that they can receive dividends that would otherwise be payable to you. There can be a capital gains tax cost of making the transfer but it’s worthwhile if the income tax saving is greater in the long run.