When it comes to family company tax saving, what are the best approaches? You may have started a company a few years ago and you’ve been told it is a good idea to give some shares in it to your young children. How should you go about it?
When your children are under 16
If you transfer shares in your company to your children, who are under 18 (or 16 and unmarried), anti avoidance rules known as the “settlements legislation” apply to any dividends paid on them. The effect of the legislation is to treat the dividends as your income for tax purposes. This means there’s no immediate family company tax saving to the arrangement, but there can be in the longer term.
When your children are over 16
When you children reach 18 (or 16 and married) the settlements legislation ceases to apply. This means dividends on your children’s shares will no longer be taxable on you. Instead they are officially part of your children’s taxable income. Therefore, instead of having to dip into your savings to bail out your youngsters while they are at university you can pay them a tax efficient dividend instead.
The tax saving is achieved if you would pay higher tax rates on dividends compared to those your children will. Unless they have significant income they’ll have a dividend nil rate band (assuming it still exists by then) and basic rate band available to minimise the tax on the dividends.
Bearing in mind that you’ll pay tax on your children’s dividends until they reach 18 (or 16 and married) you have two options. You accept the tax bill (which wouldn’t be any greater than had you kept the shares and received the dividends in your name) or create one or more separate classes of shares. The latter will allow you to defer paying dividends until your children become liable for the tax on them.
Where you give your children some of your shares or create a new class of shares and allot them to your children, HMRC will treat the transaction as if you had sold part of your company. This might result in a capital gains tax bill.
However, giving shares to your children while your company is relatively young and hasn’t building up profits means the value of any shares will be relatively low and the CGT liability is kept to a minimum. Where you create a new class of shares with no voting rights and perhaps with a fixed rate of return. The advantage of this is they generally have a value around par, which avoids valuation arguments with HMRC and makes the CGT predictable.
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