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.

35 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
  5. shah ammad

    Hi
    Can I set up a new company: with the shares essentially worth very little as it has no income and is a start up. If those shares are owned by grandma and she decides to transfer these at her nominal cost to her grandchildren after say 6 months or less when the company is still a startup. Would there be no cgt as the shares have very little value in a start up with little or no income ?
    When would the children be able to receive dividends ?
    Would this also avoid inheritance tax later ?
    Is there any further benefit for them by becoming directors after age of 16 ?
    Thank u
    Doc

    Reply
    1. Owen Beswick

      Hi there,

      Grandma could transfer the shares, but up until 18 the parental tax rate would apply on income generated. I feel that children need to be 18+ to be shareholders in their “own right”, i.e. with an accompanying personal allowance(s)!

      If the children own shares, then it depends on when they received them and if the grantor remained alive for seven years after the gift as to whether IHT would be payable

      Children can be employed from the age of 16, so whilst you may not make them directors, they could be employed, as long as your accountant was happy that they were being gainfully employed to work in the business.

      Best wishes, Owen

      Reply
  6. Kevin Mayes

    Hi Owen
    Could you clarify if children under 18 in receipt of Dividends from a company where shares were given to them by grandparents or uncles can receive them free from tax if the their total dividend & any any other income does not exceed the Personal Allowance of £12,570.
    In your reply you said the children pay tax at their parents rate but do the chilldren not get PA & £2,000 div allowance ?
    Gift of the shares has been accounted for to HMRC.

    Reply
    1. Owen Beswick

      Hi there,

      Whenever younger children are involved then there is always the chance that HMRC will take a view and decide that tax is due at the parent’s rate if they “follow the cash”. Alternatively, you could potentially make grandparents shareholders (they would receive the £2000 allowance plus other dividend monies). They could then consider gifting the money to the children as a regular “gift out of income”.

      Providing this was regular, documented and in place for some time, this would normally be accepted, as all gifts made this way fall outside of the Estate from an IHT point of view.

      I hope this helps!

      Best wishes, Owen

      Reply
  7. Clayton

    Hello Owen,

    Do you have the legislative reference for the minors being taxed at the parent’s rate of tax?

    Reply
    1. Owen Beswick

      Hi there,

      There are numerous legitimate ways of avoiding inheritance tax including; gifting, trusts, AIM investments, BPR registered products etc. I would suggest organising a meeting with an adviser to talk about your options.

      Best wishes, Owen

      Reply
  8. Tony

    Hi Owen
    Would appreciate a sense check on an idea were considering. We currently have two properties, 0 mortgage, 1 residential (not main) & 1 rented, share split is 88/12% and 50/50% between parent & child respectively.
    If both properties are sold and the money is used as capital to start a property company with the child (18+) as director and 100% owner, would there be any IHT/CGT implications? Presumably invested capital would be treated as a gift and subject to IHT within 7 years? What about if it’s treated as a loan instead? The plan would then be for the parent to be hired as an employee / also be minority shareholder (different class, dividend receiving only) and receive salary – instead of the previous set up where there is net rental income.
    Many thanks

    Reply
    1. Owen Beswick

      Dear Tony

      It is quite a comprehensive plan that would need assessing, and as I am sure you can understand, not one that can be dealt with in a brief exchange. There are a lot of tax implications and we would need to fully understand what you wish to achieve. If you wish to take this further then you could arrange a meeting with one of our advisers. Feel free to contact us.

      Best wishes, Owen

      Reply
  9. Jack Williams

    Hi Owen,

    I have a limited company of which my wife and I are teh only share holders. We have two children who are under 16 years old. They both attend private school and we were wondering is there a way to pay for their school fees by setting up a trust fund or something which the company can contribute to their education?

    Reply
    1. Owen Beswick

      Hi there

      The short answer is “no”, not until the age of 18 really – possibly a little earlier; at this age, your children could become employees of the company, but your accountant (and by default, HMRC) would need to see that they actually have a role. At this age, they could be shareholders of the company through the issuance of a different “class” of shares to the ones you and your spouse/partner may have. Then your children can receive dividends. £2000 of dividends is currently untaxed, but you could potentially pay them dividends up to the personal allowance. They would then pay no tax on £12570.

      You could potentially make grandparents shareholders, and then they use the dividends they receive as gifts out of income to pay school fees. However, you would certainly need to run this by an accountant, as HMRC may take a very dim view of this approach.

      If you have cash in the company, then you could make it work a little harder by investing in various products that should, over time, produce bigger gains than cash in the business account. Gains would be taxed at the corporation tax level, and the money would still need to be paid out to you and your partner/spouse – so you would incur personal tax but this may be acceptable all things considered!

      Feel free to contact us if you would like to discuss further.

      Best wishes, Owen

      Reply
  10. Karin

    Hi, I am about one week away from opening a small business. As my husband is still working elsewhere, he will be director with me, but I will be the only shareholder. I have three children, age 12, 14 and 15. What will be the wisest way to include them as shareholders with minimum tax complications?

    Reply
    1. Owen Beswick

      Hi there

      Regardless of whether your husband is working elsewhere, I would probably still make him a shareholder to improve flexibility. I would consult with your accountant to outline future plans for you, your husband and your current/future financial situation – this will inform your accountant as to the best approach.

      It could be that your husband is a minority shareholder in the first instance. Regarding your children – they are too young to “benefit” from being shareholders (any dividends received would be taxed at the parental rate). But it may be possible to set up a separate share class, with a view to the future. Again, this is something I would take up with your accountant.

      Best wishes, Owen

      Reply
  11. Sarah

    Hi, I have a limited company and want to pay out the dividends as efficiently as possible. My husband and I have the same class of share so will need to have the same payout. My husband is a higher rate tax payer so he will have to pay the higher rate. My son is 17 now, (and has a different class of shares so I can pay him a different amount) I know I can pay him £2000 with no tax implications. Can I also use his personal allowance. He does not earn any other money. If I pay him more, what are the tax implications? Will he need to do a tax return?

    Reply
    1. Owen Beswick

      Hi Sarah

      This sounds like a conversation you need to have with your accountant. If you are paying him a salary, he will need to have a job which the accountant can discuss in detail. When your son reaches 18, you could discuss alternative share-class options as well.

      Best wishes, Owen

      Reply
  12. Steven Cohen

    Hi,

    I have a LTD company, I hold 100% of the shares and want to add my daughter as a share holder so she can withdraw dividends to pay for her education, she’s only 3yo, I know I can’t gift her the shares, as any dividend pay out would come under my tax, if the grandparents were to buy shares in my LTD company for her as a gift, does that mean she would be able to withdraw dividends under her own tax allowance.

    Reply
    1. Owen Beswick

      Hi there

      Grandparents could buy shares, but they/you would obviously need to be aware of potential costs including; stamp duty and/or CGT for instance. However, assuming the grandparents own the shares, then ongoing dividends would be taxed at their personal marginal rates. They could then gift the remaining net amount to their granddaughter. However, this is not that tax-efficient!

      So, the alternative would be for the grandparents to place their shareholding in trust. Dividends payable would be taxed at the trust rate (45%). BUT, as the income is effectively being distributed to the granddaughter (we assume this is within her “personal allowance”) she is able to claim a tax refund.

      An example of this is as follows:
      Assuming £6,000 is distributed to the granddaughter, in order to fund this, the trust would need a dividend from the company of approx. £10,909, on which it will pay £4,909 (45%) of tax, leaving a £6,000 net payment. The granddaughter would have had gross income of £10,909, including a tax credit of £4,909. £10,909 is within the grandchild’s personal allowance, and the tax credit can therefore be recovered in full.

      As you can see, this is quite a complicated process (although I have tried to make it as basic as possible, and therefore it is not all encompassing) and the involvement of a trust, stamp duty, CGT, IHT etc etc. All have to be considered “in the round”.

      Therefore, it is essential you seem guidance from your accountant and adviser working in tandem.

      Best wishes, Owen

      Reply
  13. Steven Cohen

    Hi Owen, thanks for the reply, I will have a look into setting up a trust.

    Just to clarify, my parents couldn’t buy shares in my company for my daughter, so my daughter owned the shares, and could receive dividend payouts.
    That way I haven’t gifted them, and any dividend would come under her tax allowance?

    Reply
    1. Owen Beswick

      Hi Steve

      No – your daughter doesn’t own the shares – the trust does. Your parents buy the shares and then place them in trust. Your daughter is the beneficiary of the trust, so when dividends are paid to her from the trust her personal allowance can be utilised.

      Please feel free to contact me directly for any further help.

      Best wishes, Owen

      Reply
  14. Damian Cluskey

    I am a 50-50 percent shareholder in a limited company can I give my shares to my son or do I have to offer them to my partner?

    Reply
    1. Owen Beswick

      Hi there

      Gifting shares may result in capital gains (for you) and possibly IHT. Unless you have a specific “first refusal” agreement, then I don’t see any reason why you couldn’t offer your personally held shares to any individual you like. I would talk to your accountant about setting up a new share class within the company (“ABC shares”). This leaves you with your voting shares but also the ability to pay dividends on other shares rather than your own. However, I strongly recommend you do this with your accountant’s advice/support.

      Best wishes, Owen

      Reply
  15. Roger Sumner

    Good morning I have a substantial income from a BTL business and pensions. I want to be able to generate an income for my 4 grandchildren. On studying the current Tax legislation i have found that they can earn Tax free up to the current Personal Allowance but any Dividends received on shares in my business would be taxed on their parents.
    To me this does not make sense as any dividends paid have already been taxed. Similarly, what is the situation if some of my Grandchildren do not have any living Parents and my proposals are to provide for their upkeep and longer term income when they are 18 and may wish to go to University.

    Reply
    1. Owen Beswick

      Hi there,

      Dividends received by children will be taxed as if received by their parents, i.e.; taxed at their parent’s nominal rate of income tax. You/they don’t pay two lots of dividend tax.
      In your situation, I would probably lean towards creating an additional “share class” to your existing voting share class, with the help of your accountant and financial adviser and making your grandchildren shareholders. From the age of 18, they can legitimately receive dividends, up to the personal allowance, and pay no income tax.

      A great way to fund their university education!

      Best wishes, Owen

      Reply
  16. Worried mother

    Hi there!
    I’m a single parent with a limited company and 100% shareholder with no option to include grandparents in any process. The company owns a small piece of land worth less than £9k which I want my 9 year old son to have for his future. I don’t have any savings and can only work part time due to my caring responsibilities for him so this is the only way I can help him financially. I am researching adding him as a shareholder. There is no money in the company so I can’t pay any dividends but I’d be grateful to know the options if we sold it at the £9k or if by some miracle a developer wanted to buy it for more. How would my son get all the money and what taxes would he/I have to pay if he was still under 18 please e.g. how do I take the money out of the company for him efficiently.

    Thanks in advance.

    Reply
    1. Owen Beswick

      Hi there,

      You could introduce your son as a shareholder at age 18. At this age then there are potentially more options. If you sell the land now as an asset of the company, you would potentially pay corporation tax on any gains/profit made. Then, assuming that was done, the money in the company could be paid to you as the shareholder. You would then pay tax at your highest nominal rate. You could then gift the remaining resultant cash to your son at any age. However, you would need to consider inheritance tax etc.

      Best wishes, Owen

      Reply

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