Tax Planning – Ideas & Opportunities

Synopsis: 50% tax (42.5% for dividends) should prompt a review of dividend policy for married couples!

For those company owner/managers who are married but where the shares in the business are concentrated in the hands of one of the married couple who is a “high earner” then next year´s tax changes should act as a prompt to at least consider a transfer of shares to their non or basic rate taxpaying spouse.

Provided the shares transferred carry full voting, capital sharing and dividend rights and all the formalities are complied with, there should be no reason why the strategy should not be effective to substantially reduce the couple´s overall tax liability on any dividends declared.

Under current law, post the Arctic Systems case, such dividends should not be caught by the settlements legislation and the savings could be substantial.

If, say, a dividend of £50,000 were payable in 2010/11, then for a 50% additional rate taxpayer the effective rate of tax payable on the net dividend would be 36.11% and the additional tax therefore payable on the £50,000 dividend would be just over £18,000.

If, instead, the shares were owned equally and the previous shareholder´s spouse was a non or basic rate taxpayer, then the additional rate payer would pay tax of about £9,000 (on a £25,000 dividend) and the new basic rate shareholder would pay no tax – provided, of course, that the grossed-up dividend did not take the shareholder over the higher rate threshold. Even if it did, the effective rate on any excess would be 25% rather than 36.11%. The overall tax bill on a total dividend of £50,000 under such an arrangement could thus be £9,000 rather than £18,000 – a 50% reduction.

Subject to non-tax considerations, such a strategy would be well worth considering.

The transfer of shares from one´s spouse (or civil partner) to another would be IHT free by virtue of the spouse exemption. For CGT, the transfer would be on a no gain/no loss basis but with no revaluation.