Gifting company shares to family for tax efficiency

01 March 2022
2 min read
Published:

Michael Lansdell compares the long-term and short-term advantages when gifting shares to family.

If you give shares in your company to your children, to gain extra profit, this can be a way to plan your tax affairs efficiently, without falling foul of any rules.

If you transfer shares in your company to your children under 18, there are anti-avoidance rules known as “settlements legislation” that will apply to any dividends paid; the dividends will be treated as your income, for tax purposes. Any tax advantage is in the long and not short term; thus, this comes under anti-avoidance “planning”.

Long term
Settlements legislation ceases to apply once your children are 18, so dividends on their shares will be part of your children’s taxable income. You can therefore pay them a tax-free dividend, rather than use your savings, if they need cash when they’re at university, training or travelling etc. The assumption is that your children will be on the dividend nil-rate band and basic rate band.

Short term
Under this arrangement, you will be paying tax on your children’s dividends until they reach 18, so you can either a) accept the tax bill or b) create a separate class (or classes) of shares and allot them to your children, to defer paying dividends until your children are liable for the tax on them. Be careful though, as when you give your children shares, or create a separate class of shares for them, this might trigger in capital gains tax (CGT), as HMRC will treat the transaction as if you had sold part of the company.

If the business isn’t that old, and hasn’t built up substantial profits yet, this could be the optimum time to give shares to your under-18s, as their value will be relatively low, keeping CGT minimal. Or, when creating a new class of shares, perhaps give them a fixed rate of return, for example, or no voting rights. This will give them a value around par, avoiding an argument about valuation with HMRC, and you’ll be able to predict the CGT better too.

There is a difference between good planning and avoidance, and giving company shares to your children is an excellent illustration of the former. You will stay compliant, and be taking steps to organise your long term tax affairs in an efficient manner.

For more guidance on tax planning that will keep you within the rules, give the team at Figurit a call, for quality advice.

For help with business or personal tax planning, call Figurit on 020 7376 933.