Long-term tax planning for children and shares

Your children might be too young to take over the family company, but can you reduce tax by giving your children shares now?

 

 

Parents try to mitigate their tax bills by diverting income to their children that are under 18.

These schemes fail because of HMRC’s anti-avoidance rules called settlements legislation.

These make parents liable for the tax on any income from assets transferred to their children.

 

Anti-avoidance rules stop you from avoiding tax by transferring shares to your children, but there may still be tax advantages to these transfers.

Paying tax on your children’s dividends doesn’t increase your tax bill as you would have to pay tax on this income anyway.

However, giving children shares now can save money in the future.

 

On either reaching 18 or marrying the settlements legislation stops applying.

This means you are no longer liable to pay the tax on your children’s’ dividends.

 

Jon is a higher rate tax payer.

He gives a small numbers of shares in his company to his child, Betty.

The dividends on these shares are taxable on Jon until Betty becomes 18, when they become taxable on her.

Assuming that Betty has no other income, she would be able to use her personal allowance to reduce the tax she pays on these dividends.

This means Betty can use this money to fund herself with the extra tax saving, instead of Jon funding her without Betty’s extra personal allowance.

This could be useful if Betty was attending University.

Jon could use different classes of shares which would allow him to pay dividends to Betty at a different rate to himself.

 

If children are shareholders and a company is wound up, the children are entitled to a part of the proceeds.

Any capital gain would be taxable on the child. This applies even if the sale or winding up occurs when the children are minors.

Each child would be entitled to an annual exemption to reduce their capital gains tax bill.