Children Shares and Long Term Planning

Your long-term plan is for your children to take over the family company but they are too young at the moment. Nevertheless, is it worth giving them shares in the business now as a tax saving measure?

Shares for children - image of piggy bank

For almost as long as income tax has existed parents have tried ways to mitigate their tax bills by diverting income to their minor children. These schemes have almost invariably failed because of HMRC’s wide-ranging anti-avoidance rules. The effect is that parents remain liable to tax on income derived from assets (unless the income per child is less than £100 per year) e.g. cash, stocks, shares etc. 

While the anti-avoidance rules prevent you from shifting the tax bill on dividends by transferring shares to your children, there can still be tax advantages to it. The first point to note is that while you’ll pay tax on your children’s dividends this doesn’t increase your tax bill as you would have had to pay tax on them anyway. What’s more, giving away shares now can save you tax later.

Once the child reaches 18 it means you’ll no longer be liable to pay the tax on dividends paid to your children.

Phil is a higher rate taxpayer. His company issues a small number of shares to his two children (aged 5 & 8), 5% of the company’s ordinary share capital each. The dividends paid on these are taxable on Phil. When each of his children reaches 18 they become taxable on the income. Both children to into further education. They can use the dividends they receive from the company to help fund them through university. f they didn’t have this Phil would have to fund them from his taxed income. Assuming the children have no other income, the tax saving would be significant. 

If received by PhilIf received by children
Taxable at 32.5%£18,000
Less tax free personal allowances, say 
Tax payable£5,850Nil

Because of early tax planning Phil has provided a source of tax-free money for his children for when they reach 18.

To make the planning flexible, Phil’s company could issue alphabet shares to the children, e.g. a different class of ordinary shares from those owned by him. This would allow the company to pay dividends at different rates to each shareholder.

If Phil were to sell or wind up his company, part of the proceeds would be payable to his children as shareholders. Any resulting capital gain would be taxable on them even if the sale/winding up occurred when they were minors. However, each are entitled to an annual exemption to reduce their capital gains tax bills.

See also: What are the rules if you put your wife, husband or children on the payroll?