Giving shares to your spouse

Giving shares to your spouse, wife, husband or civil partner

Giving shares to your spouse is the most frequent situation here. It’s usually where one person has set up a business, and their husband or wife is working for the company.

They might be working all week in your business or doing a bit of admin to help out. Or they may not be working in the company at all because they are busy with their own business, job or looking after children.

Giving shares to family members or children

It might be that your son or daughter is working in the business and you want to give them some shares now because you want them to take over eventually.

Or you might want to give shares to your children so that you can pay them dividends from your business.

I’ve seen a few people want to do this because of the increased tax on dividends for the company owner. Why not share out the tax burden, especially when your children might not be using all of their allowances. And some people want to give shares to their children because they are planning for the long-term and want to avoid inheritance tax.

Or you might want to get your grandad, auntie or cousin Bertie to put some money into your company, and you’re giving shares to this family member in return for the money they’re investing. There are some disadvantages to this kind of share issue, and I have more advice on this here.

Giving shares to your partner who you’re not legally married to

Maybe like me, you’re one of those who has never bothered to go to the trouble of getting legally married, but you’re with a long-term partner. You might want to give shares to your partner for the same reasons as you would want to give shares to your spouse that you’re legally married to. But although we think of this as the same situation, HMRC will see this as very different because you’re allowed to transfer assets without tax implications to someone you’re married to or are in a civil partnership with.

Giving shares to employees or an investor

This is completely different, and if you’re thinking about giving shares to employees or an investor, you need to read this article instead. Unless your employee or investor is your wife.

Giving shares to family members when you set up the company

This is the simplest way to do it. When you set up the company, you decide that you’re going to give some shares to family members. There’s no tax implication because the company has no value when you first set it up, so you’re not giving anyone any assets that HMRC would be interested in. And you can allocate the shares in the same paperwork that you use to set up the limited company.

But if you’re just about to set up your limited company and blissfully give 50% of your shares to your spouse, children, or Uncle Bertie, do read the next bit first.

Do you really want to give shares to your spouse?

I’ve never met your wife/husband/partner/eldest son, so I can’t comment on your relationship. They might be the loveliest, most loyal wonderful person ever. I hope they are. But…all of the 130,473 couples who got divorced last year probably thought that their new wife or husband was the loveliest, most loyal person ever when they got married. And as those stats are even higher for couples who live together and then split up, we do know that these setups don’t last forever.

Your company might last for longer than your marriage.

Sorry. But it gets worse.

You can’t split up from your children; they’re always going to be your child. But you also don’t know if you’re going to want your son or daughter to be working in the company forever. Or that you’re going to want to pay them dividends every year.

One of my clients gave his daughter shares in his company some years ago so he could give her dividends while she was at university. He thought it would be a smart way of helping her out financially. And a way of saving some tax of course. But then she graduated and got her career going, and now she earns more than he does. But he still has to pay her dividends, because he didn’t set it up in the right way. See below, when I talk about the A and B classes of shares.

Very often people give shares to family members because they want to be generous, or because they think there’s a tax advantage in doing this. But it’s worth considering this carefully before you give away 50% of the business. You can’t easily take the shares back once you give shares to a family member.

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Giving shares to your spouse when you’re already trading

If you didn’t give any shares to your spouse or other family members when you first set the company up, but you decide that you want to now, there are a few things to think about first.

The classic situation is where you’re making some money from the company, and your partner is working part-time, or looking after your children. And they’re not using all of their tax allowance. You, on the other hand, are paying yourself the maximum dividends from the company before having to pay a higher rate tax.

So, you start to eye up your partner’s unused tax allowance and think that you could take more out of the company if you could give shares to your partner. And they could use that to pay off the mortgage or buy you both a holiday.

It used to be that you would claim that your wife (it usually was this way round) worked in the company, give her some shares, and then pay her a salary and some dividends. Saving you lots of tax, getting your mortgage paid off faster and you could enjoy the holiday your wife had bought for you both.

But it’s not so simple, here’s why

I know people still do this because they tell me about it in the pub. But it’s not so simple nowadays. If your partner or child doesn’t truly work in the company, HMRC can challenge this, and you might have to prove that they work there.

In this situation, especially if your company has some decent profits, you need to get a good accountant to advise you on how to give shares to your wife, covering what proportion of the company you can allocate to them. Plus, the level of dividends and salary you can pay out to them. Get your accountant to do the sums for you to see if it’s worth doing.

If your partner works in the business, you can legitimately give them shares and pay them a salary based on the work they do. Some people have tried to reduce their corporation tax bill by claiming their partner works in the business and paying them a salary for some imaginary work. HMRC know all these dodges and look out for companies doing this, so don’t try this one.

If your partner is a director or company secretary, you may be able to pay them a little bit each year for taking on this responsibility. Remember that making someone a director also gives them a degree of control of your business, so think this one through as well.

Tax on shares you give to your wife, husband or partner

If you’re officially married, you can give shares in your company to your wife or husband and they won’t have to pay any capital gains tax, even if your business is worth serious money. They will have to pay income tax on any dividends you give them from the company, and the amount of tax they will have to pay will depend on how much income they have from elsewhere.

If you’re not officially married, then your beloved might have to pay Capital Gains Tax on those lovely shares you give them in your company. If your business is making a good profit and is worth real money, then HMRC will see you giving something of value to another person. And as we know, whenever something with value changes hands, HMRC want their share. They notice your partner getting more share capital, even though in this case, it’s shares, not cash, and they want to charge them Capital Gains Tax.

Here’s a very rough example

If your business is making profits of 80k a year, it might be worth 280k. If you give 25% of the shares to your partner who you’re not married to, HMRC will say that you’ve effectively given them 70k (25% of the 280k). They have made a capital gain in accountant language. They then have to pay HMRC Capital Gains Tax of 10% of 70k less the 11.1k capital gains tax allowance. That works out to 5.9k on their tax bill.

All of these numbers vary a lot according to how your business might be valued, and your partners’ other earnings, so don’t take them as being directly relevant to your situation. Get an accountant to do the working out for you; they love this kind of thing. And they can talk to you about the tax savings of setting up a pension for your partner as well, which you should also take into account.

The thing to think about here is whether it’s worth generating a potential capital gains tax bill by your gift of shares to your partner and if you will save enough money by paying less dividend tax.

Think about what kind of shares you want to give to your family member

Many business owners decide to give class B shares to their spouse, so they can decide year by year how much dividend they pay to them. As the business owner, you usually have class A shares.

If these are the only shares you’ve issued, they will automatically be class A shares. You can decide to give your spouse class B shares so that you don’t automatically have to pay them dividends in precisely the same way as you pay yourself the dividends.

What my client who gave his daughter shares while she was at university, could have done was to allocate her the 15% of the company in class B shares. Then when she had her own money, later on, he could have stopped paying her the dividend, and keep it all for himself. She wouldn’t have minded, because all she wanted was some extra cash while she was at university. The same applies if you want to give shares to your wife, husband or Uncle Bertie.

It keeps your options open.

But, let’s look ahead

Giving shares to a family member isn’t just about being able to give someone dividends. If you give them shares, they will continue to own those shares. And if you want to sell the company, the new owner will probably want to buy all of the shares. They are unlikely to want to buy only your shares and leave your partner holding 20% of the share capital

Look ahead to 10 years from now. If you give shares to a family member now, when you come to sell the company, they will still have the shares.

Maybe you sell your business for 10m. Nice. But, say you’ve given 15% of the shares to your partner, instead of getting 10m, you’ll get 8.5m. And your partner will get 1.5m. This might be a good thing, as you’ll be able to use your partner’s capital gains tax allowance and between you, you’ll pay less tax. Or you won’t care, you’ve got 8.5m.

When it might not be so good

There are a couple of horrible things that might happen to think through here. I hope they won’t, but it’s worth just spending a few moments on the worst-case scenarios.

What if you give 15% (or 49%) to your partner, and five years later, you get divorced. They still own the shares, just like they still own the jacket you got them for their birthday.

Or worse. What if you give 15% of the company to your grown-up son. And then (I told you this was horrible) he dies. And in his will, all his property goes to his wife. Now your daughter in law owns 15% of your company. Which you’re just about to sell for 10m.

This may not be a big deal for you. Maybe you’re perfectly happy for your daughter-in-law to inherit shares in your company if something bad happens to your son. Or for your ex to still own shares after the divorce. But, again, you might want to keep your options open here, just in case your relationships change in the future in a way that you can’t predict at the moment.

Get a shareholders agreement whenever you give shares to a family member

I always recommend getting a shareholders agreement when you give shares to a family member, even if you’re giving shares to your wife or someone very close to you. The shareholder agreement protects you in case anything changes in the future.

In particular, you should write the shareholders agreement so that the shares can be bought back by the company, and that he shares are automatically returned to you (or to the company) if the shareholder dies.

Don’t be put off by the hassle of doing this, see it as insurance against bad things happening in the future.

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Help with working all of this out

Giving shares to your partner or anyone else can be confusing, so it can be useful to talk this over with someone else who has done this a few times. People often come to me for a couple of hours of advice to get all this clear, so they know exactly what they should do.

You can book a 2-hour session with me to get this straight in your head and make sure you have everything right before proceeding.  Here’s how to set up a meeting.

Other helpful articles about how to give shares to others

You might want to also read these articles about shares and equity:

The main article on giving shares to other people – How to give shares in your business

Giving shares and equity away

Getting investment into your business

The difference between share options and shares for small businesses

The big danger in chasing investment

What are growth shares?

The advantages and disadvantages of a share issue

Photo credits to David Everett, Diomari Madular, rawpixel, Toa Heftiba from Unsplash, Elliot Brown from Flickr and Liz Finlayson from Vervate