Transfering Shares to the Wife of the Shareholder

Transfering Shares to the Wife of the Shareholder

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I have a client who has 50% shares in his company, and his wife has the other 50%

He is due to take full time employment at the end of the year. At this point he wishes to transfer his shares to his wife. This way she can  take 100% of the dividends an he does not go into paying higher rate tax. (Through not receiving both his Salary from employment and Dividends from the company)

Is this "legal" and if so are there any Tax implications to this, as he still wishes to remain as a director of the company with no shares.

Thanks in advance.

Replies (13)

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By jessica_arora
19th Jun 2014 16:30

 

 

 

There will be capital gain tax to consider on transfer of shares however there will be no capital gain tax due if the shares are transferred to wife as long as :

both have lived together for at least part of the tax year in which the gift is made the gift isn't 'trading stock' 

 

Thanks (1)
Stepurhan
By stepurhan
19th Jun 2014 16:34

Difficult

If the company is no longer trading, (as seems likely in the circumstances) then this is almost certainly a transfer of a right to receive income. The shares would have to be transferred outright and the husband would have to not benefit from the income in any way for it to have a realistic chance of avoiding attack by HMRC. Do they really need the funds out of the company enough to risk that?

By the way a thing is either legal or it isn't. "Legal" would only be appropriate if you were intent on making something actually illegal look as if it was legal. I presume you aren't trying to do that.

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By gbuckell
19th Jun 2014 18:04

Right to receive income

stepurhan why do you say that this is likely to be a right to receive income if the company has ceased trading? If it only holds investments I would have thought that strengthened the argument that it is not a right to receive income rather than the other way round.

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Stepurhan
By stepurhan
22nd Jun 2014 14:43

Right there in the question

OP wrote:
This way she can  take 100% of the dividends...
Dividends are income. The intention is to transfer the shares to the wife so she is the one who receives those dividends. If the company has ceased trading, she can't even claim to be taking an active role in its management.

That is about as clear a transfer of a right to receive income as I have ever seen.

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By gbuckell
23rd Jun 2014 10:20

Income producing asset

The question does not make clear what is the source of the company's income. The implication is that it may have ceased trading and is now simply an investment vehicle.

I do not see how this makes the shares merely a right to income. A spouse might transfer, say an investment property to the other spouse to allow that spouse to receive the income. That is not merely a right to income.

Even if the company remains trading, the Arctic Systems case is authority for saying the shares are not merely a right to income. In my view, for a non trading company, the case is even stronger.

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Stepurhan
By stepurhan
23rd Jun 2014 10:42

Taking a reverse view

My point is actually that the problem is with the company NOT trading.

Arctic Systems did indeed say that shares were a bundle of rights, of which a right to income was merely a part. My point is that, if the company is not trading but solely distributing retained profits, what other rights are there? In a trading company a shareholder is able to influence the direction of the company business. If the only decision they are actually able to make is how much dividend to pay, what other rights are there that make it more than a simple right to income? You claim that the case is stronger for a non-trading company. Can you expand on why you think that is the case?

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By Steve Kesby
23rd Jun 2014 10:49

@ stepurhan

The wife now has control of the company; she has all the votes. She can use those votes to ensure that rather than pay her lots of dividends ad infinitum, the company is liquidated now, so she gets all her cash as a capital distribution. Why she'd actually want to is a different matter.

So, do you really think that what the wife has been given is nothing more than a right to income?

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By gbuckell
23rd Jun 2014 10:55

Capital

Let us assume a non-trading company that has retained profits. These profits take the form of cash and/or other investment assets. These, presumably, generate an income which can be paid in the form of dividends. But, as Steve says. she owns the shares and hence all the underlying capital. There is now real capital there rather than, with the Arctic Sytems scenario, merely a conduit for an individual's earnings. That is why I say there is a stronger case for a non trading company to be more than a right to income.

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Stepurhan
By stepurhan
24th Jun 2014 20:51

If no capital distribution

I take the point about capital distribution instead. I now see what you mean about that being a separate right that makes shares more than just vehicles for income.

Whilst I appreciate that point, what if the wife does just take dividends year after year? The retained profits are still earnings of someone else that would now be funnelled, albeit delayed, to the wife. If she really did just take income for a number of years, do either of you feel that would weaken the argument, or is the potential for capital distribution enough?

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By PracticePartner
25th Jun 2014 08:50

Other options

Why not make the transfer now, or before the end of the year, while the company is still trading?

Depending on how much cash is in the company might he be better off winding up the company and claiming Entrepreneur's Relief, thereby paying 10% capital gains tax and utilising his CG exemption if he hasn't already?

And a question: are husband to wife (as in this case) transfers affected if the wife is a director at the time of transfer? Specifically, is it (more) likely to be fall under  Employment Related Securities if they are both directors?

 

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By Steve Kesby
25th Jun 2014 10:00

@ PracticePartner

What makes you think the company is still trading or, alternatively, hasn't stopped trading yonks ago? Do companies always only stop trading at their financial year-ends?

If the wife can extract all the income over a period of years within her basic rate band, that's tax at 0% on the distribution, rather than the 10% that the husband would pay with the benefit of ER. I'm not convinced the company isn't trading though, as the OP doesn't say. A trading company can still be run while a person is in other full-time employment.

Whether or not the shares are ERS, any tax charge that arises if the shares are given to the wife because of her actual or prospective directorship will come under s. 62 rather than the ERS provisions. That charge will only apply if the shares are given to her by reason of her actual/prospective directorship, rather than because she's the current owner's wife.

I doubt even HMRC would be suspicious that he's giving her the shares for any reason other than that she's his wife, meaning that there's no s. 62 charge. The shares will then only be ERS, if they were originally ERS by reference to the husband.

@ stepurhan The point is that the settlements legislation probably does apply (because the wife is receiving the fruit of the husband's toil (which is what wives do! :), if it weren't for the spousal exception. The spousal exception only applies where there is an outright gift and that gift isn' of a right wholly to income.

Because the shares represent a basket of rights not just to receive the income (albeit that may be the effect), it can't be said to be a right wholly to income, because the other rights that pass with the shares mean that it's up to the wife whether or not she gets income or capital

Thanks (2)
Stepurhan
By stepurhan
25th Jun 2014 10:26

Thanks Steve

I'm convinced. Another thing that should be simple over-complicated by the law, but I now agree with you and gbuckell.

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By PracticePartner
25th Jun 2014 10:38

@Steve Kesby

On the matter of trading I drew the inference from the OP's statement that the husband would be taking a job at the end of this year. On ER, its perhaps an alternative if a share transfer was deemed to be a problem, otherwise if wife can draw dividends at 0% that is of course better. Thanks for your response on my ERS question.

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