Mark McLaughlin looks at capital gains tax entrepreneurs’ relief for spouses or civil partners.
Family companies have always been a relatively common and popular trading medium, particularly husband and wife (or civil partner) companies.
This popularity is likely to increase over time, following changes to the income tax regime for dividends from 6 April 2016. The possibility of husband and wife each utilising a dividend nil rate (or ‘allowance’) of £5,000 may be a factor in shares being transferred between spouses, with a view to both spouses being shareholders and receiving dividends in respect of their shares.
Think it through
Of course, the tax (and non-tax) implications of gifting shares between spouses must be considered carefully in advance.
For example, the couple (or their advisers) may be aware that disposals between spouses living together in the tax year are normally treated as made for capital gains tax (CGT) purposes on a ‘no gain, no loss’ basis (TCGA 1992, s 58(1)). In addition, for inheritance tax purposes transfers between spouses are normally exempt (subject to an exemption limit if the recipient spouse is not domiciled in the UK; see IHTA 1984, s 18(2)).
The ‘settlements’ income tax anti-avoidance rules are unlikely to apply to the recipient spouse’s dividends if there has been an outright gift of ‘plain vanilla’ ordinary shares with no strings attached (ITTOIA 2005, s 626; see Jones v Garnett  UKHL 35). However, if the recipient spouse is an officer or employee of the company, it needs to be considered whether the value of the shares could constitute employment income in his or her hands.
Even where the inter-spouse gift of shares has no immediate tax consequences, there may be implications further down the line.
For example, both spouses will no doubt wish to claim entrepreneurs’ relief (ER) on a future sale of the company if possible, to take advantage of a CGT rate of 10% on gains from disposing of their shares (i.e. up to a lifetime limit of £10 million each). However, the ER rules could be problematic.
The ER provisions on a share disposal (such as in the above example) normally require that certain conditions are satisfied for at least one year ending with the date of disposal; firstly, the company is the individual’s ‘personal company’ (i.e. at least 5% of the ordinary share capital and voting rights are held) and is either a trading company or the holding company of a trading group; and secondly, the individual is an officer or employee of the company (or of a trading group member) (TCGA 1992, s 169I(5)).
The ‘officer or employee’ condition is a potential pitfall, as the spouse who received the gifted shares (e.g. wife) will often not satisfy this requirement for at least a year before the shares are sold. Furthermore, the wife’s shareholding may be less than the necessary minimum 5% of ordinary share capital and voting rights for the company to be her ‘personal company’ for ER purposes throughout that period.
In such circumstances, consideration could be given to the wife transferring the shares to her husband (if enough of his £10 million ER lifetime limit is available on a sale of the shares). In the above example, it is assumed that husband already satisfies the ‘officer or employee’ and ‘personal company’ conditions for ER purposes on a sale of the company’s shares. It is therefore not necessary for the husband to have held the additional shares from his wife throughout the one-year qualifying period.
If the inter-spouse gift of at least 5% of the company’s ordinary share capital and voting rights is being made (i.e. to the wife in the above example) and the recipient spouse is not active with the company, consideration should be given to appointing her as an officer (e.g. secretary) for at least a year before any future disposal of those shares (e.g. a company sale) if she is to claim ER.
This article was first printed in Business Tax Insider in October 2016.