As a small company owner, you may have considered sharing your company’s shareholdings with your spouse. This practice, often referred to as dividend splitting, can offer significant tax benefits. However, it’s crucial to understand the rules and implications to ensure you’re making the most informed decision for your business.
The Benefits of Dividend Splitting
Dividend splitting allows you to distribute your company’s dividends between you and your spouse, based on your shareholdings. For instance, if you both own 50% of the shares, each of you would receive 50% of the dividends. This strategy can be particularly beneficial if one of you is earning over the higher rate tax starting point (£50,270 for the 2023/24 tax year). By adding a spouse as a shareholder, you can utilise their tax-free allowance and basic rate tax band, potentially saving thousands of pounds in tax each year.
The Rules of Dividend Splitting
To benefit from dividend splitting and avoid questioning under settlements legislation, you must adhere to three key conditions:
- Ordinary Shares: The shares being paid as dividends must be ordinary shares, meaning the shareholder has full voting rights and capital distribution rights. The shareholder should also play an active role in the company.
- Shared Address: The spouses or civil partners in possession of the shares must live together. If they do not, the exemption to settlements legislation will not apply.
- Outright Gift: The shares being paid as dividends must be classed as an ‘outright gift’. This means that the money belongs entirely to the shareholder and should not be used as a way of moving money back into the household and therefore into the pocket of the main shareholder.
Income Shifting and A and B Shares
Income shifting refers to the practice of giving personal income to another individual who pays tax at a lower rate. This is where the concept of A and B shares often comes into play. However, it’s important to note that creating different share classes or frequently changing shareholdings could attract HMRC’s attention. Therefore, it’s generally recommended to decide on the percentages from the start and stick to them.
Potential Pitfalls
While there are clear benefits to splitting company shareholdings between spouses, there are also potential pitfalls to consider. For instance, the shares must be an outright gift, meaning they are effectively given away. This could have implications in the event of a separation or divorce.
Conclusion
Splitting company shareholdings between spouses can be a beneficial strategy for small company owners. However, it’s essential to understand the rules and potential implications. Always consider your personal circumstances and seek advice from an accountant before making any decisions. By doing so, you can ensure you’re making the best decision for your business and your family.
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