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Am I missing something

I always believed a child's income was taxable on the parent

Didn't find your answer?

I have just come off of a call with a potential new client who has shares in his company, as does his 14 year old son and his brother and father. (all 4 are different share classes)

He draws dividends up to the £50k threshold when combined with salary, his 14 year old son has £12k of dividends and his brother and father receive ad hoc dividends that seem to vary (i havent seen the full history as this was an introductory call). 

I queried the dividends paid to the son (and looking at Companies House he has had these shares since 2015 when he was 9) as the £100 rule applied in my head with no exceptions and he told me that "his current accountant said it was OK to use the sons allowances as long as the cash is kept in an account in the sons name and not accessed by him the father at all).

I must admit this was new to me but i have read online a few comments on various websites that say that if it is demonstrated the child paid for the shares using their own funds that did not come from the father (eg a grandparent) then the income would be taxed on the child not the parent but that is caveated with the fact that it may be challenged by HMRC (settlements legislation)

Am i missing something here ? to my mind this was not an option (ie the £100 rule always applies) but to avoid me looking like I have missed something i thought i would check with fellow readers.

Replies (21)

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ALISK
By atleastisoundknowledgable...
23rd Mar 2021 14:09

I believe that if it’s a ‘proper’ business and the income isn’t heavily reliant upon a parent (as it would be in, say, a contractor company) then your potential client’s situation is acceptable*. I think Jeremy Vine had this set-up with his daughter?

*for now at least, until HMRC change the rules.

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Replying to atleastisoundknowledgable...:
Part on Dudes
By Partyondudes
23rd Mar 2021 14:32

Thanks. It is indeed a one director consultancy company so very reliant on the father. See my note below re shares being subscribed for - not sure if that affects ?

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Replying to Partyondudes:
ALISK
By atleastisoundknowledgable...
23rd Mar 2021 15:47

As far as I can remember, the nature of how the profit is made means that this client's arrangements fail.

I looked into it (and spoke to the tax god that is Tim Good) shortly before the birth of my first child and decided that being the only director and major lynchpin of the company, we just about failed that test.

I've love to be proved wrong ... my toddlers are left with 'just' £100 dividend income pa.

If I remember correctly, Jeremy Vine's set-up only paid his daughter £100 pa, it was long term planning for when she turned 16/18(?) and would be entitled to full PA, but also for to avoid anti-settlement on a future MVL. Something about inheritance as well, but it was a while ago...

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By Mr_awol
23rd Mar 2021 14:25

I'm not 100% certain in this area but i believe the £100 limit only applies to income earned as a result of the parents - i.e. savings on cash balances gifted by parents, or dividends on shares gifted by parents, etc.

My children (well not the baby - yet) earn more than £100p.a. in bank interest but not on savings which came from me or their mum, so we aren't taxed on it. My parents control the childrens' savings accounts and i have no involvement in them at all - as i requested for this very reason. Mum wanted to put money into the kids' savings accounts but i just handed over the birth certificates and told her to sort her own out.

I would imagine (but haven't looked) mum could have bought them all Barclays shares, etc and still there would have been no issues. Perhaps she could even have given them shares in the family business (as long as they were hers and dads, not mine, and possible not new issued shares either).

So - where did the shares come from? Once you determine that you might have your answer (or if they were new shares you might have a harder question)

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Replying to Mr_awol:
Part on Dudes
By Partyondudes
23rd Mar 2021 14:31

Thanks. At this stage i am not sure so would need to ask. Company was formed with x2 Ord shares and then a further 398 were issued a week later to the various shareholders mentioned. So i suspect they were all subscribed for not gifted. If it helps company is a one director consultancy service.

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By frankfx
23rd Mar 2021 14:34

May be okay.

However it is essential that you request the original paperwork.

Have HMRC ever enqiured into the arrangement?

Former accountant a may have details on Permament file, if client has misplaced this vital documentation.

The arrangement may well have been established upon taking professional advice.

Ask for copies .

Who prepares dividend paperwork and board minutes?

You may be tasked with this .

Where are the childrens accumulated dividends held?

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By ireallyshouldknowthisbut
23rd Mar 2021 14:57

The question re the brother/father is surely "what happens to the cash?"

That is to say do the then pass it back? or buy things for the contractor?

All sounds highly suspect to me.

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Replying to ireallyshouldknowthisbut:
Part on Dudes
By Partyondudes
23rd Mar 2021 16:02

Thanks for the reply. I did ask about the brother and father and repatriation of cash but was assured it was not. The potential client earns £150k pa and gives dividends to them (again i am not yet sure of the amount) because he can afford it, father only has state pension income and nothing else and brother earns a low salary so he is just being kind. So i am told at this stage. On those two i would be happy for written confirmations from all parties that is the case it was just the son i was unsure about but maybe i need to question the father/brother more.

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By Paul D Utherone
23rd Mar 2021 15:49

Your initial statement that "a child's income was taxable on the parent" is not entirely correct, nor that "the £100 rule always applies", but the latter would be dependent on the caveats that you have found in research and your penultimate paragraph.

The income might make use of the child's SPA and only be assessed on the parent of a minor as guardian but that would depend on source of the original funds, and if the income arises from shares in the parent's company, even if invested with funds not arising from the parents, you are probably getting onto shaky ground.

My children are just old enough to have caught the tail end of the old grandparents deed of covenant ruse where I would make a repayment claim for the tax deducted at source from the covenanted payments received, and also tax on the dividends arising from all the de-mutualisations at around that time purchased with the funds arising from the deeds. £100 was not relevant there. But if I had said to my sister "I'll do a covenant for your children if you do the same for mine", then the quid pro quo would likely have made it so

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By More unearned luck
23rd Mar 2021 16:05

You don't say what the company does. If its a 'proper' trading company, say an engineering company with employees then , subject to the conditions you mention it's probably OK, unless dad is paid a very low salary.

If its a PSC then, in Jones v Garnett the House of Lords held that arrangements of this type are bounteous. I think that this so regardless of how the child acquired the shares, if in substance the dividend is dad's earnings, the settlements legislation applies. That is to say, dad is taking a low salary in order for there to be more profit out of which dividends could and were paid.

The saving grace for Mr Jones was that the settlements legislation did (and does) have a carve out for gifts to spouse unless they are gifts of income. In your case the carve out doesn't, of course, apply.

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Part on Dudes
By Partyondudes
23rd Mar 2021 16:13

Reading the replies it seems that it "might be possible" if it was "done correctly at the outset". in the first instance i will ask for further clarification on what happened and when with the original accountant.

When i questioned it with him he did say if i am not allowed to then i wont but i want to make sure i am getting it all correct.

That said when i asked about P11ds i was advised on is not done which surprised me as the existing accountant (ICAEW firm) does his personal tax return, so there should be an accountancy BIK, and when i also aksed questions like "is the mobile bill in your or the company's name" was told it was in his personal and the accountant said that was OK (I explained it wasnt for VAT and P11d purposes and he did agree he would fix that going forward) and would happily have a P11d prepared.

Before i go back if anyone can confirm the child share issue and the options we have which seem to be he cannot do it, but i would like to make sure i am 100% sure of what is possible before i go back and then decide if i want to act or not. I do believe the gentleman as he said he is seeking better advice but i am concerned what he has been told before may be incorrect.

Many thanks as always

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blue sheep
By Nigel Henshaw
24th Mar 2021 06:25

I wouldnt worry about the P11D for accountancy fees, that is pretty much never done in my experience apart from a few isolated cases where the SATR prep is more than just a simple employment/dividend job.

On the main issue agree with other posters, you basically have two issues really - a) where did the money come from in the first place fo the child to make the investment? I often have this conversation with clients when they ask can they put investments in the childs name - first question is, where has the child got the money from in the first place, they might possibly have funds in their own right and are quite free to invest and earn income but more often than not the parent intends gifting the funds.
b) but the bigger issue is the settlements (ITTOIA/S629) and I do not see how you can avoid that in this situation, if I was taking this client on I would firstly ask the existing accountants why they think the current arrangements comply with current legislation, I would ask the client to ask for the same in writing, and I would make it clear to the client that your opinion differs and warn of potential issues.

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Replying to NH:
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By Tax Dragon
24th Mar 2021 09:04

Where it's not done in practice, (in my experience) that's almost invariably because it's correct not to - there's a separate fee that the director pays (possibly via the DLA). Where it's not correct not to, it's done.

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Replying to Tax Dragon:
ALISK
By atleastisoundknowledgable...
24th Mar 2021 09:47

In 95% of cases, Director SATRs are FoC (pure coincidence that the ltd accy fee is increased by £100-£150 on the original quote).

Normally posted to the DLA if not. Sometimes posted to the P&L in error.

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Replying to atleastisoundknowledgable...:
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By Tax Dragon
24th Mar 2021 10:27

That's probably bad practice. There's (supposed to be) a contract with the director. Contracts mean both parties 'give' something - accountant does the work, director pays a fee. Take the fee away and maybe the contract isn't what you think it is. Result: accountant is working for free. Possible consequences may include loss of protections e.g. limitations on risks (I don't know- IANAL).

Put it another way, I very much doubt any of the big boys would countenance such an arrangement in any circumstances. You might question their tax and accounting skills, but you'll appreciate their legal departments are rather better than yours, and there'll be a (sound legal) reason why they don't go where you and NH have gone.

(Btw, Alisk, I thought your opening responses above on the OP's question were bang on the money. You might want to reduce children's dividends to £99 now, so that bank interest doesn't take them over the £100 threshold.)

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Replying to Tax Dragon:
blue sheep
By Nigel Henshaw
24th Mar 2021 10:49

I think you are confusing the issues there, if you provide a LOE for a complete service with one fixed fee as we do, the contractual relationship is established with no fee breakdown by individual service required.

In most cases the SATR is a 5 minute job in what might be 2 days work for the client, so to attached a P11D value to that 5 minutes (which would probably work out at about £5!) is non sensical

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Replying to NH:
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By Tax Dragon
24th Mar 2021 11:06

So maybe it's the position that none of the big boys (nor I suspect any medium sized firm) would ever provide a LOE for a complete service with one fixed fee covering X clients (the company, the director, in the OP's case the director's son and dad, etc). We're well below medium-sized and we wouldn't do this.

You probably need to up your minimum fee too. Being prepared to bill £5 for a year's tax work for anybody is nonsensical.

Sorry, OP, gone well off-topic. This should be a separate thread.

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Replying to NH:
Part on Dudes
By Partyondudes
24th Mar 2021 11:09

Thanks NH. Re the a and b options you mention the settlements issues are indeed what i have concerns about, i have this morning asked for the full historic trail and advice to see what the position is.

Regarding the P11d for accounts fee it is one thing i always do or transfer part of the fee to the DLA (although if they have reclaimed the vat it is a pain). Even though some SATRs do take 5 minutes as you rightly say i always do this after i was told by HMRC officer on a PAYE inspection a few years ago (not that such things happen anymore!) that one of the first things they check on a compliance visit is the P11d/accountancy fee issue because if it has been treated correctly (ie included on the P11d or paid personally by the director or credited to DLA) it gives them comfort that the rest of the PAYE compliance is likely to be correct !

As i say the likely hood of such visits happening are low these days but it is an insurance policy i like to stick to (as with the mobile phone contract in the right name)

And Tax Dragon no need to apologise for going off topic!

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By brumsub
26th Mar 2021 10:50

I think you will find that this arrangement (re any minor children) will come within the settlements legislation, but you need full details of the background. In a similar case, Mr & Mrs Bird v HMRC Commissioners [2008], the taxpayer lost this case.

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By Tomazaan
26th Mar 2021 15:42

To clarify one comment the potential new client made: it used to be the case that if a parent set up a bare trust for a child and did not touch the money held in the trust, the £100 rule did not apply even if the income arose from assets provided by the parent. This changed in 1999 (I think). It sounds as if the current accountant is thinking of that rule and has not realised that it was changed for bare trusts created after the cut-off date. A bare trust created in 2015 would be caught by the parental settlement anti-avoidance rule.

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