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.
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.