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  3. What do I need to be aware of when appointing my spouse or civil partner as a second shareholder?
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  3. What do I need to be aware of when appointing my spouse or civil partner as a second shareholder?

What do I need to be aware of when appointing my spouse or civil partner as a second shareholder?

There are several considerations when appointing your spouse or civil partner as a second shareholder:

Ensure your second shareholders have the right sort of shares -that is, ordinary shares with rights to vote and to capital.

If your second shareholder is your spouse you are able to transfer the share(s) between yourselves without incurring any tax liabilities. If your second shareholder is not your spouse, any transfers of share(s) may give rise to Capital Gains Tax and/or Inheritance Tax if there is any growth in the value of the shares.

Get the paperwork right.

In order to prove that the director(s) of the company considered and voted for a second shareholder and considered the dividend split between the two shareholders, it is important that adequate documents are completed and retained.

Document the initial dividend split and stick with it

The split of dividends between you and your second shareholder should be agreed and documented at the date the shares are issued. The timing and frequency of changes to the dividend split with your second shareholder will also impact on the risk of HMRC successfully challenging the arrangement. For example, frequent changes throughout the year and/or a final change towards the end of the tax year may indicate to HMRC that mitigating tax is the sole reason for the arrangement.

Do not pay excessive dividends to your second shareholder. The higher the proportion of dividend paid to your second shareholder the more chance HMRC may choose to challenge the tax position. We would not recommend that the split exceed 50% in favour of the second shareholder.

If you need to change the split, document the reason and be careful to continue to get the dividend paperwork right.

Always document any subsequent changes to the dividend split. If you wish to change the dividend split during the year, as is common practice in many small companies, you must document this by ensuring the dividend split on the dividend vouchers represents the revised split. Do not change the dividend split retrospectively. We would never advocate the change/allocation of a dividend split after the tax year has ended or after a dividend has been voted/paid. This is clearly tax avoidance.

Record your second shareholder’s contribution to the business.

Consider and record commercial reasons for the appointment of the second shareholder and any changes to the dividend split. HMRC is also likely to look at the purpose of the second shareholder arrangement. For example, if it was determined that this was solely to use up the second shareholders’ lower rate tax bands and you were still able to benefit from the dividends paid then they are more likely to argue the arrangement is a “sham” and no gift actually took place. If you are able to demonstrate that your spouse made a meaningful contribution to the running of the company your position would be strengthened, as you would be able to demonstrate a commercial arrangement was in place. Your second shareholder probably does support you in the business. Putting some notes on this in the documentation of the split will help convince HMRC of the commerciality of your agreement.

If the second shareholder’s commercial contribution to the business increases this could support an increase in their dividend share. They do not need to be able to carry on your profession to be of commercial benefit to the business, partners can provide assistance with administration or financial management.

Updated on 8th June 2023

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