Can I gift a share in my company to my wife? Are there any tax consequences?

The issue of splitting limited company shares with a spouse or partner has been the subject of much confusion and debate over the past few years.

We asked Derek Kelly, MD of ClearSky Accounting, what limited company owners should consider before gifting shares to a spouse or partner:

The issue of ‘income shifting’

“This process is what HMRC refer to as ‘income shifting’ and it has received a lot of negative media attention in recent years in the contractor press. Where an individual provides his services through a limited company, HMRC’s view is that any income should be taxed on him as the fee earner.

“They could, therefore, challenge an arrangement that sees a spouse receive shares in the company (and as a result receives dividends) where the main reason for doing so was to utilise the personal allowances and basic rate band of the spouse, minimising any overall tax liability.”

The Arctic Systems case

The previous Government were particularly keen on using their interpretation of the Settlements Legislation (Section 660) to prevent limited company owners from splitting their shareholdings with their spouses where both partners did not have an active role to play in running the business. Especially if one shareholder has no, or limited income from other sources, this can be a significant tax-saving strategy for a couple.

The so-called ‘family business tax’ campaign came to an abrupt end when the House of Lords ruled in favour of Arctic Systems Limited (an IT contractor owned company) and dismissed HMRC’s attempts to retrospectively tax the business using s660a (Settlements Legislation).

Derek Kelly continues:

“As mentioned above, there has been much discussion on this topic in recent years and it is thought that the new ‘Office for Tax Simplification’, appointed by the coalition government, has been tasked with drawing up a proposal that ends the uncertainty in this area.

“HMRC had previously challenged and won a case against a company called Arctic Systems where they deemed that dividends paid to the wife should, in fact, be taxed in the hands of the husband. On appeal, this decision was overturned but a statement from the Government confirmed that the area of ‘income shifting’ needed to be reviewed.”

Get a professional opinion

As with all issues involving share capital, you should always seek professional advice from your accountant before taking any action:

“In summary, the gifting of shares to a spouse needs to be carried out with extreme caution. HMRC have confirmed that each case will be judged on its own merits so a professional opinion should be sought before transferring shares.”

Partner Contractor Accountants

Last updated: 17th October 2022