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Doesn't the extra income affect the loans / grants they could get? I am not sure what is means tested and not.
Grants no longer generally available for students in Englang, & possibly Wales. All finance is by way of loan.
I think the point is that they do this because they already won't get grants, and want to avoid incurring £50k of loans. This essentially represents the family funding the education through the family company, and the author is illustrating a way for the student to suffer the tax on the income paying for that education rather than, say, the parents or grandparents suffering that tax.
If your parents are paying you dividends its unlikely youll get any grants due to teh family wealth ...btw
Isn't there a risk that the settlements legislation could apply even for adult children? HMRC's settlements guidance refers to any family member - see below.
Income being transferred from the person making most of the profits of a
business to a friend or family member who pays tax at a lower rate.
That quote is presumably taken from TSEM4325. And I wonder whether the previous comment about paying dividends forever was prompted by a similar thought: is there an argument that the shares retained by the parents are related property (s625(5)), in the sense that, were the new shares to cease paying disproportionate dividends after graduation, then their value would reduce, because it would pass back to the original shares still owned by the parents?
Maintenance loans are not usually sufficient to cover all living costs, so most parents will be giving their child some money towards living costs (unless the child earns enough from part time work), whether or not they also want to avoid having a student loan. (For most students, it makes sense to take the maximum loan possible, whether or not the parent or student could manage without it, but that's a different topic, so let's not get diverted onto this.) This article is just saying that rather than receive dividends, pay tax on them, then pass net amount to child, better to give them dividends direct, so no income tax is paid. Good idea.
Maintenance loans are means-assessed, based on parental income (not wealth), unless the child is self-supporting. So, I suspect that if some dividend income goes direct to the child, it will reduce parental income, so could help to increase the amount of the loan, if parents are close to a threshold for increasing the maintenance loan.
There is no reason why, with proper implementation, the settlements legislation in the link below would apply and potential CGT re non-trade companies and control concerns can be dealt with via s260 TCGA 1992 & trusts.
https://www.gov.uk/hmrc-internal-manuals/trusts-settlements-and-estates-...
Justin - just to be clear, are you suggesting that the only way to avoid the settlements legislation would be to involve a Trust? Thanks.
Tax planning is all well and good but what happens when the child is 3 years in, drunk and bombing in their degree, and you want to stop paying the dividend to motivate them to sort themselves out? What about when they leave Uni - who forces them to sell?
Presumably using Alphabet shares would be better eg split parent shareholding of 100 shares into 90 A shares and 10 B shares, then transfer B shares ranking equally in all respects to child...
I can't see any commercial reason for this type of transfer other than tax avoidance.
It would be very risky. I'd never suggest this type of false arrangement.
Why do the shares given the to student (assume student is 18 years +) need to be ordinary shares? Wouldn't irredeemable, non- voting preference shares be fine too? Wondering what I've missed.
Arctic systems turned on the fact that the spouse was given ordinary shares, which did more than receive income. They were entitled to full rights including voting, and participation in winding up. This related to a spouse but presumably, could be extended to other recipients in application. Sure I'll be corrected if not...
You will be corrected. In Arctic Systems, HL concluded that there was a settlement, but it was between spouses. S626 provided an exception for outright gifts between spouses (and now civil partners too of course) so long as (condition B) the property was not wholly or substantially a right to income. Ordinary shares, as you say, did more than provide income. So the spouse exception applied.
That said, you were of course indicating that ordinary shares would be less risky than tbennett's suggestion of prefs. I would agree with you, in that regard. Arctic perhaps shows that there is, even so, some risk.
This is an excellent planning suggestion.
Two issues are bothering me but may well be manageable?
1) Is HMRC likely to invoke an income tax charge as outlined in ERSM60030 -Alphabet Soup?
2) Is this planning reportable under DOTAS?
Sounds risky, but for those happy with the risks...
Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended.
It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter, but not the spirit, of the law.
Most tax avoidance schemes simply do not work, and those who engage in them can find they pay more than the tax they attempted to save, once HM Revenue and Customs (HMRC) has successfully challenged them.
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When tax advisors devise alphabet share schemes &/or other artificial convoluted schemes one can start to understand why HMRC seem to have an unwritten / hidden agenda to cut tax advisors out of dealings beween taxpayers and HMRC. ... "Lunn" "NT Tax advisors" .. at the end of the day individual advisors will choose what level of tax avoidance / planning is acceptable to themselves / safe for ther clients (eg. low salary / high dividends) - whilst others will feel perectly comfortable going for more unconventional / untried / untested / risky schemes.
As a variation on the theme what about the following. A formal interest free loan is put into position for £X thousand pounds between student and relative (parent or grandparent) repayable after the course length and secured on the shares the student invests in. The investment is in stock exchange shares or say a FTSE 100 ETF such as ISF. The income is for the student and either tax free to £5000 or if greater covered by their personal allowance up to £11000. At the end of the course the loan is repaid and the student takes any capital gain with the loss either being borne by the relative or considered a debt (but much less than the equivalent student loan would have been). The arrangement does require there to be wealth in the family but it is a useful swapping of a high tax liability for the students probable nil liability. The interest free loan does not give rise to any tax charge but the potential debt write off needs IHT consideration.