The pros and cons of making a spouse a shareholder

For so many of us, running our business is the primary means to providing for our family which is our main priority. If that’s the case for you, then you’ll be seeking out effective ways to extract funds from your company for your personal use. You may well have already heard the advice about making your spouse a shareholder in your limited company, but is it really a good idea?

We offer impartial insight into both the pros and cons of making a spouse (or civil partner) a shareholder to enable you to make that decision for yourself because, like businesses, marriages and civil partnerships are personal to your own circumstances. We’ll consider various tax implications as well as family scenarios to give a comprehensive overview on the potential benefits as well as disadvantages.

Don’t I have to make my spouse a shareholder at the time of incorporation?

A lot of people ask us whether they can add shareholder to their company after it’s been incorporated and the answer to that is yes. So, just because you’ve already set up your company, perhaps even established it over a number of years, this does not mean that you can’t add more shareholders to it at a later date.

You’ll need to decide how you want to issue shares to your spouse as this can be done either through a transfer of shares that you hold, or an allotment of shares (which is issuing new shares). Transferring shares requires filling in a Stock Transfer Form and an allotment of shares requires you to file a Return of Allotment of Shares (SH01) form with Companies House. With both options, don’t forget you have to update your confirmation statement with Companies House to ensure they are publishing the correct information.

Can I just gift shares to my spouse?

Yes, you can, but it must be a genuine gift. Under normal tax rules, husbands and wives (or civil partners) can gift assets to one another which is capital gains tax-free. However, HMRC also has the Settlements Legislation which prevents people from diverting their personal income through another person who is subject to a lower tax bracket. Despite this, the case of Arctic Systems upheld that married couples can split income in this way so long as the following conditions apply:

• The shares gifted must be ordinary shares which allow the shareholder to have full voting rights, dividend distribution, and capital distribution
• The shares must be an outright gift which means that the spouse is free to do with them as they wish
• The couple must be living together in order for the spousal exemption to apply

Where any of these three points are not the case, HMRC may be able to tax the gift giver the full amount of dividends issued under their own personal tax bracket.

Does it have to be 50:50 split?

Not at all, you can decide how you would like the total shareholdings in your company split. A 50:50 share would mean that your spouse or partner is entitled to the same voting rights and dividend distributions as yourself. Whilst this is not uncommon between spouses and partners that have equal involvement in the running of the company, this may not be the case for you. Where you want your spouse to be a shareholder so that you can take advantage of the tax benefits but also want to retain overall control of your company then you can decide on completely different shares such as 90:10 or any other split that is suitable for your own personal circumstances.

What are the pros of making my spouse a shareholder?

Let’s get into the section that you’re probably most interested in. Will making your spouse or partner a shareholder in your company really save on tax, and should you do it? There’s no definitive answer to this but we can highlight the opportunities that you can benefit from.

1. One of the main reasons that people often include their spouse as a shareholder is to make use of and maximise each person’s dividend allowance. Currently, individuals are entitled to receive £500 in dividends tax-free each year which is separate from your personal income allowance of £12,570. Where your spouse doesn’t receive any dividends, adding them as a shareholder means that their dividend allowance isn’t wasted.
2. The next reason why it can be a good idea to make your spouse a shareholder is where you can make use of any unused personal allowance or a lower tax bracket. If your spouse does not receive any income or is on low income, then allowing them to receive dividends as a shareholder in your company can make use of both their personal allowance and dividend allowance. What’s more, if they are taxed at the basic rate tax band and you’re already in the higher or additional rate tax bracket then you’ll be able to extract profits from your company at a lower tax rate. However, it is essential to remember that your spouse must be living with you and free to use their dividends how they wish as outlined by the Arctic Systems case above.
3. You may decide that significant involvement from your spouse could actually benefit your business, especially where they have a valuable skillset that can help you. You might then want to consider hiring them as an employee as well making them a shareholder, and this would certainly support your defence against any claims of income splitting from HMRC should they arise.
4. Finally, having a trusted spouse or partner can give you reassurance that your business will continue to run if you are no longer to manage it yourself. A carefully considered share split can be particularly important where you have multiple shareholders, including those which are family-run businesses.

What are the cons of making my spouse a shareholder?

1. Making your spouse a shareholder does not automatically guarantee that you’ll save tax. Where your spouse has their own income and is already subject to the higher rate tax bands then there are no tax savings to be had apart from potentially utilising the annual dividend allowance if they do not receive dividend income already.
2. As a shareholder, they essentially own part of your company. This means that when it comes to making important decisions, they’re entitled to have a say and can influence the outcome. Whilst this can be easily managed by retaining the controlling share in your company, you should consider how disagreements may affect your personal relationship.
3. Continuing on the subject of disagreements, many directors of limited companies are understandably concerned about what happens should divorce arise. However, on a practical level, even where you have not issued shares to your partner, the courts can still order that half your company be given to them should they find it equitable to do so as part of the divorce settlement.

How does my spouse receive dividends?

Once you have made your spouse a shareholder, they’ll receive dividends in the same way as you. Officially, you should hold a board meeting which includes them and you should agree to issue dividends and a dividend voucher should be issued to each shareholder. For information on the correct way of issuing dividends, you can find guidance from our article “How to take out dividends from my limited company”.

Do they have to complete a self-assessment tax return?

If they already complete a self-assessment tax return to declare other income, then they must include information on any dividends they receive from your limited company. If they are not registered for self-assessment, then they should let HMRC know about the dividends and then tax can potentially be deducted automatically from any PAYE income they may receive through their tax code. You only need to do this where the dividends you receive are more than the annual dividends allowance. However, if you receive £10,000 or more in dividends then you must complete a self-assessment tax return.

Get tax advice from an accountant

Still not sure on what you should do, or have other factors that you need to consider? Why not speak to us and arrange a tax advice or tax planning consultation to create your own bespoke tax strategy plan for your personal tax as well your business? Get in touch today.