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Shares for family

Client is doing very well, thank you, despite the economic gloom for everybody else. The co-founders and shareholders now regret not issuing shares to spouses and minor children when the company started. What would be the tax implications if they now rectified that?

Spouses both work a bit in the business but the familial relationship would presumably exempt these shares from the employee share rules? But would the dividend income be at risk of attack as a settlement or similar? (I'll admit at this point that the tax treatment of shares seems to have developed into a lacuna in my knowledge).

Dividend income on the minor children would still be taxable on the parent, I assume. Is it still possible to avoid that problem by way of a trust (ignoring the practical problems with trusts for a minute) or was that effectively knocked on the head a few years ago when it was all change? If, on the other hand, a hit is accepted now by gifting the shares directly to the children, what happens re the income once they reach the age of majority? Does it just become their income or would there still arguably be a settlement?

Many thanks in advance for any and all responses.

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By MBK
15th Feb 2012 08:20

Quite a bit here

Firstly, assuming the company is a trading company, there is no hit on gifting shares - holdover relief will be available.

Gifts to spouses should be fine - but consider what happens if there is a divorce. If you want to cover this off with a shareholders agreement be very careful about what goes in concerning repatriation of the shares in the event of divorce etc. Otherwise you won't have any problem with the settlements legislation or the ERS legislation as regards the spouses.

Minor children is much more diffiicult. Outright gifts are a real problem because you never know what the child will turn out to be like later. Trusts have issues, but a discretionary trust could be one way forward if the parents are willing to run with the penal tax rates involved. And, as you say, any income distributed from the trusts will be taxable on the parents until age 18 anyway - but not after age 18. Consider why there is any need to gift to children in their minority. It doesn't help with income tax, nor does it help with IHT if the company is going to qualify for 100% BPR. So my advice to clients is generally to leave gifts to children until quite a bit later.

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16th Feb 2012 09:48

Thank you

MBK, thank you very much for your reply. Very helpful.

If I may ask a follow-up, why won't the settlements legislation be an issue for spouses and the taxation of their dividend income? I've obviously missed something but isn't that what settlements are designed to catch? Or is it because the spouses work in the business? And if so, how much work is enough work, if you know what I mean?

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By MBK
16th Feb 2012 10:23

Settlements are not an issue...

.. because the Arctic Systems case established beyond doubt that, where there is a "no strings attached" gift to a spouse of ordinary shares, then (although there is a settlement) the exemption from the settlements legislation for outright gifts to spouses does actually apply.

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16th Feb 2012 12:24

Many thanks once again....

...for your replies on both threads

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