Tax benefits of private limited companies with children as shareholders

If you’re a shareholder of a private limited company, spreading the ownership and therefore dividends around the family can offer real tax advantages. Especially if you are adding your children as company shareholders.

This has become all the more valuable since the changes to dividend taxation that took place in April 2016, and then the reduction in the tax free dividend allowance from £5,000 to £2,000 in April 2018.Should you add your children as shareholders of your company?

Can you add children as shareholders of a private limited company?

There is nothing to prevent shareholders from gifting shares to their children, regardless of their age. There are, however, various tax implications in doing so.

Your children as shareholders

If your children are over 18, they will be taxed on any dividends they receive. Assuming they are lower rate taxpayers, this potentially gives you an immediate tax advantage.

If your children are younger than 18, you as the parents will be taxed on any dividends they receive which eliminates this tax advantage.

You may also be required to pay capital gains tax at the time of the gift, so the transfer should be carefully managed with professional advice to ensure you keep within your CGT allowance (£12,300 for the 2020/21 and 2021/22 tax years) or spread larger share gifts over a number of years to avoid a large tax bill.

Your grandchildren as shareholders

If you are a grandparent gifting shares to your grandchildren, it’s a slightly different story. Although you will be liable for any capital gains tax at the time of the gift, it’s your grandchildren who will be taxed on any dividends they receive (not the grandparents or parents).

It means you could play a canny hand that would not only help to financially support your grandchildren, but may also reduce the value of your estate for inheritance tax (IHT) purposes.

Gifting shares and Inheritance tax (IHT)

Giving shares to your children would be considered as a gift for the purposes of inheritance tax. If the transferor (person giving the shares) dies within 7 years of making the transfer, the transferee (child) will be liable to pay inheritance tax. The level of tax which needs to be paid will depend on the number of years that have elapsed between the gift being made and the death on a sliding scale known as taper relief: 40% if less than 3 years; 32% for 3-4 years; 24% for 4-5 years; 15% for 5-6 years; and 8% for 6-7 years.

Inheritance tax  – good news!

For gifts up to £3,000 in value. They can be made each year without being subject to inheritance tax (known as an annual exemption), so you could transfer shares in £3,000 chunks each tax year. It’s a great way to reduce your estate for IHT purposes and if the grandchildren are over 18 and not using their income tax allowance then a good way of boosting their income if dividends are paid. (See above)

You MUST transfer shares to your children for the market rate. You can’t pretend £10,000 worth of shares are worth £3,000. In this example the £7,000 difference would be considered a gift and liable for the tapering scale as noted above.

Should you add your children / grandchildren as company shareholders?

In reality, most medics and dentists with a private practice have young families and no grandchildren. Even so, you may still decide to gift shares to your children in anticipation of them turning 18.

Gifting a relatively small proportion of your company shares on a piecemeal basis may enable you to:

  • Start reducing the value of your estate for inheritance tax purposes.
  • Give your children a shareholding which may provide a tax efficient source of dividend income when they reach 18 (useful to fund their university tuition and/or living costs).
  • Give your children the opportunity to utilise their annual capital gains tax exemption when they eventually dispose of the shares. This could also be useful when you liquidate the company.
  • Transfer capital (ordinary shareholding) to the next generation without triggering capital gains tax. By gifting shares on a piecemeal basis, you can utilise your annual capital gains tax exemption.

Taxation legislation and regulation are constantly evolving. It’s therefore always wise, and good practice, to regularly review your current financial strategy and company structure with your financial adviser, solicitor and accountant. 

Making children shareholders can have advantages but it’s not for everyone and it’s not easy so take the best advice you can before making any changes.

Would you consider adding your children as shareholders of your company? Let us know by adding a comment below.

Editor’s note: This post was originally published in October 2016 and written by Matt Sharp of Sharp Medical Accounting.  It has been completely revamped and updated for accuracy and comprehensiveness.

8 thoughts on “Tax benefits of private limited companies with children as shareholders

  1. Ian Clark

    Hi there,

    We have a limited company and both myself and my wife are share holders. I am retired now and we receive dividends from our investments in the business account. How can I make my children who are over 18 years share holders, without them having to buy any shares in my compan. This is so that when we die they don’t have to sell the dividend paying stocks and continue receiving dividends.

    Reply
    1. Owen Beswick

      Hi Ian

      Taxation to be considered: IHT, CGT, income tax and stamp duty (I’ve discounted this on the assumption that the shares are a “gift”.)

      Inheritance tax (IHT): You could “gift” your shares to your children. There will be a potential inheritance tax liability for 7 years.

      Capital gains tax (CGT): A transfer of assets/shares gives rise to a capital gains situation. Potentially you could receive “gift relief” with respect to capital gains which is a way of deferring the tax and passing it on to the recipient rather than it falling on you.

      Income tax: This could arise but if it can be demonstrated that the transfer is for reason of family or personal relations, income tax may not apply.

      As is always the case with a situation like this, I would approach your accountant to confirm a way forward. Beyond this, I would consult with a financial adviser to discuss all that needs to be considered.

      Best wishes
      Owen

      Reply
  2. Andrew

    Hi

    I have a limited company that is not actively trading but will be soon and will also hold some investments (in trading companies). I am the sole shareholder currently and I understand the implications of simply passing shares to my child. However, can my mother invest in the business now before we start and then, in the future, gift these shares to her grandchildren without the tax issues with then paying dividends to them? Many thanks

    Reply
    1. Owen Beswick

      Hi Andrew

      My feeling would be that a gift of the shares would count as a “disposal” and therefore Capital Gains Tax (CGT) may be payable by the grandparent. However, if there was no gain then no tax. If there was deemed to be a gain then your mother has an annual CGT allowance which would alleviate/deal with potential gains.

      There may be an IHT implication if your mother was to die within 7 years of making the gift. However there is a “gifting allowance” of £3,000pa so maybe the slow dissemination of shares to children may be a possibility also. If your mother didn’t use this facility in the previous year, then she can actually gift £6,000 in this way.

      Finally – dividends – “yes” the dividends could be paid to the children without any tax implication.

      I feel that the above is “specialist” knowledge and you have quite a specialist situation/scenario. On this basis I would encourage you to discuss this with an IFA such as ourselves.

      Best wishes
      Owen

      Reply
  3. Jane

    I own -100 % of the shares in company that
    let’s property owned by the company with no mortgage.

    I don’t need any of the income.

    Can I give a new class of shares to my 3 young grandchildren who are all under 5

    How do I value the share so give them and what tax would I have to pay on the gift?

    Can that new class of shares pay dividends out of the profits to the children it will be within their tax free allowance and could pay their school fees?

    So profit is retained in company, say £50,000 p/a we pay 19% corporation tax p/a = £9500 tax leaving retained profit £41,500 p/a can I pay say £30, 000 dividend to the children £10,000 each leaving £20,000 retained profit each year

    If I gave them the shares now but didn’t pay any dividend for a couple of years would that affect the value of the gift of shares?

    Reply
    1. Owen Beswick

      Hi there

      The questions that you are asking could have significant implications (Tax etc) and the answers therein would require a significant time input to ensure accuracy. You may also wish to consider setting up a trust – therefore I would recommend a formal meeting with an adviser to discuss your needs. However, everything that you suggest/imply, can be done and is possible.

      I encourage you to contact Legal and Medical to arrange a meeting with an adviser in your area. We are operating telephone and zoom meetings at the moment.

      Best wishes, Owen

      Reply
  4. Emma

    Hi Owen,
    Thank you in advance for all your advise.
    I have a business, but I want to diversify and looking to start the 2nd venture.

    So instead of creating a new company on my name and having 100% shares again, I put my mum (grandma) as a shareholder and my 2 young children as a shareholders too.
    In that case, assuming the company is making profit, after paying 19% corp tax , can we distribute the dividends between 3 of them? (which in return means 3 personal tax allowances up to £12500 each= £37500 tax free? )

    Reply
    1. Owen Beswick

      Hi there

      Yes you can do this but I would check with your accountant re shares for your young children. There is no hard and fast rule relating to age BUT children below 18 are classed as minors and rates of tax will be at the parental rate!

      Best wishes, Owen

      Reply

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