Long-term tax planning and your children…

Monday, November 18th, 2019

What was your dream when you set up your business?  Was it that you wanted to work for yourself and no-one else?  Did you dream that one day the business would be so much of a success you could pass it down to your children?

What if we told you that you can pass some of your business to them now and they’re only 5 and 7?

HMRC has wide-ranging anti-avoidance rules which are known as settlements legislation.  This basically means you as the parents as still liable to tax on income derived from assets (unless the income per child is less than £100 per year) which you have transferred to your children.

Can you divert profits though?

The anti-avoidance rules prevent you from moving the tax due on dividends by transferring shares to your children BUT there are still advantages for transferring them anyway.  You will of course pay the tax on any dividends whilst they are under 18, you’d be paying it anyway if you took the dividend yourself.  Transferring the shares now will benefit you in the future.

Tip.

When your child reaches 18 the settlements legislation ceases to apply, which means that they are liable to pay the tax and not you.

Example.

The best example I’ve seen is Andy, he’s a higher rate taxpayer and his company transferred shares to his 5 and 7 year old, yes he paid the tax on dividends until they were 18 but as soon as they came of age they were liable for their own future taxes.  Each child decided to go to university, costs a fortune, how are they going to fund it?  Bank of Mum and Dad? No, they’ll use the dividends they receive from the company, which means Andy doesn’t have to fund them from his own taxed income.  The savings are staggering.

  If received by Andy If received by the children
Dividends £18,000 £18,000
Taxable at 32% £18,000  
Less tax-free personal allowance, say   £25,000
Taxable   NIL
Tax payable £5,850 NIL

By transferring the shares and tax planning early enough Andy has provided income to his children for when they reach 18.

Tip.

You can transfer the shares using a different class of ordinary shares to the ones you hold yourself and therefore can pay dividends at different rates to each shareholder.

Are there more savings to be had?

If you were to sell your business, part of the proceeds of sale would be payable to your children as shareholders.  Any capital gain would be taxable on them even if the sale occurred whilst they were below 18.  Each child is entitled to an annual exemption to reduce their capital gains tax bills.

If you need advice, contact your accountant, they’re there to guide and advise you.

Alternatively, CONTACT US and we’d be happy to talk you through it.


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