Asset Splitting
As is widely appreciated, if a gift of quoted shares may be made between married persons with full effect for tax purposes, so also shares in a family company may be transferred between them; any such gift will normally be within the exception to the settlements legislation mentioned above. Thus it will not matter that either the husband or the wife is the only employee of the company and is therefore the one producing all the profits. Dividends on shares split between them are not caught by the settlements legislation and those dividends therefore go on their own respective tax returns.
This of course gives a significant opportunity for tax planning in relation to small family companies. The planning was upheld in the well-known Arctic Systems case and although HMRC attempted to change the law following that case, their proposals were eventually dropped. As a result, it is not even necessary for husband and wife to have equal shareholdings, or even unequal shareholdings – one may have all the shares and the other none of them. This means that trading via a family company can have a significant tax advantage as compared to trading as a partnership between husband and wife. Unless the partnership has significant capital assets, any gift of a partnership share between husband and wife will be classed as a right wholly or mainly to income and the gift will not therefore be recognised for tax purposes.