You can transfer shares to your spouse without any liability for capital gains tax, and your spouse will then receive the dividends due on those shares. If your spouse pays tax at a lower marginal rate, this will reduce your overall tax bill.
However, paying a dividend has implications for the amount of corporation tax you pay (see question 15). This may mean that paying dividends - instead of salaries - offers insufficient tax savings to warrant it.
In the past, companies have been set up with articles of association that allow different dividends to be paid to different shareholders, irrespective of the number of shares each holds, in order to ensure that each can use their personal allowances for income tax purposes - particularly in the case of businesses owned and run by spouses or civil partners.
However, where one individual:
- controls the income received; and
- takes part in an arrangement to give it a second individual (eg one spouse diverts dividends to the other)
new 'income-shifting' legislation is pending for income assessable in the tax year 2008/9, that will allow HMRC, if the second is receiving more than the market rate reward for their contribution to the business, to continue to tax the first individual as if the arrangement had not been made. The aim is to stop the practice of splitting income between two people in order to make use of the tax allowance of the participant with the lower earnings. The rules will also apply to partnership income. There will be an exemption for 'genuine commercial arrangements', but many family businesses will still be caught. Take advice.
