One of our clients who set up a property business with his wife a number of years ago decided they want to take a step back from the business in next three or five years. They wanted to gift their shareholding in the company to their second and/or third generations. What are the implications should we taking into consideration?
2. Direct gift of shares to minor children
Many clients may think to get their children involved and be shareholders of the company to utilise their tax allowances by extracting dividends from the company to pay for their school fees.
There will be tax and legal implications to think about.
- Under contract law, a minor does not give the legal capacity to enter into a contract to subscribe for shares and therefore you as a parent would have to consent to the share subscription on the children’s behalf in order to legally effect the subscription.
- If you do subscribe for shares on your children’s behalf, or gift some of your shares to them, the settlement legislation anti-avoidance will apply. This means that any income derived from the shares as being income for you not your children and this prevents multiple allowances and basic rate bands being used.
2. Indirect gift of shares
Some clients may ask their parents to subscribe for shares on starting up a company but shortly afterwards the parents would gift their shares to their grandchildren. You might think this could get around the settlement legislation anti-avoidance rules to benefit from using the grandchildren’s tax allowances.
However, HMRC will treat this as being a “Bounteous arrangement” in place and the anti-avoidance will apply. Therefore, any dividends receive from the company by the grandchildren will be taxed on you rather that the grandparents.
Pro advice: consider setting up a trust to gift your shares into and the dividends from the company paid to the trust could then onward distribute to the children/grandchildren.
If you would like a clear picture on how this may affect you, please do not hesitate to get in touch.