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children buying shares in family company

tax considerations of children buying shares

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I have a client running a long established private limited company owned 50/50 by he and his spouse.

He has 2 children (minors) and they've been left money from their deceased grandmother (mother of one of the limited company shareholders). It's been suggested that the children use the money to purchase some shares in the limited company, from their parents, at market value. The shares have full voting rights and entitlement to dividends (there are no alphabet shares involved).

Have any members seen this done and are there any pitfalls (tax wise?) could hmrc attack this arrangement as effectively the parents dividends will be reduced when the children start receiving dividends.

I understand that settlements legislation doesn't apply when the money being used to buy the shares is from a deceased relative so is there other legislation that could challenge this.

My concern is that the children are aged between 10 and 13 so could it be questioned that they don't have enough knowledge to be informed about making investment decisions and that might call the arrangement into question.

Presumably, the children would need to obtain UTR's and potentially fill out tax returns and be liable to dividend tax on them to the extent that the income exceed the dividend allowance plus personal allowance?

 

Any thoughts much appreciated.

 

 

Replies (10)

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By bernard michael
09th Oct 2019 10:08

Who suggested the children buy the shares ?

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Replying to bernard michael:
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By blackdust567
09th Oct 2019 11:15

the father (also shareholder of the company) has suggested they buy some shares

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Hallerud at Easter
By DJKL
09th Oct 2019 10:15

Just to be clear, children inherit and parents want to have that money paid to them in exchange for some shares in the parents' company.

Who is legally representing and protecting the rights of the children in this transaction? If this is done ,and the company flounders and the children lose their investment, have possible future legal ramifications even been considered?

This sounds like a very bad idea without legal safeguards, certainly if in Scotland and with parents acting as trustees, if I were them I would be looking over my shoulder at such an investment decision, especially if this is in effect the only funds held in trust- the all eggs in one basket risk investing in unquoted shares is stark.

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By chicken farmer
09th Oct 2019 10:52

I agree with DJKL, regardless of any tax consequences the proposal is fraught with dangers. My guess is that the parents will be trustees for the children (either specified as such in the will of the deceased or by virtue of section 42 of the Administration of Estates Act). They would then, in that capacity, be buying shares from themselves at a value to be determined by who? I suspect the parents themselves. As we all should know valuations of unquoted companies can be very subjective and thus open to challenge. What is to stop the children on reaching maturity challenging that figure? The phrase 'breach of trust' springs to mind.

I think the proposal does not pass the smell test. The motive behind it might just be a way for the parents to get their hands on the loot.

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By pauljohnston
09th Oct 2019 11:18

I feel you all are jumping up and down too much. In the end it is the parents that wll make the decision.

Dont forget minors should not hold shares but adults should hold them as bare trustee until 18 years of age. Income will be that of the minors but unless it exceeds PA and dividend allowances no SA for them.

As to voting that will be governed by Memo and Article. The bare trustees will be able to vote but they will need to be wearing the correct hat to avoid being accussed of benefiting from the holding.

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Replying to pauljohnston:
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By paul.benny
09th Oct 2019 17:42

pauljohnston wrote:

I feel you all are jumping up and down too much. In the end it is the parents that wll make the decision.

And therein lies the problem. Is this purchase of shares in the best interest of the children? The parents are inherently conflicted because they are prospective seller, trustee* and quite probably directors of the limited company.

The parents could sell their shareholding at an inflated price and then mismanage the company while taking inflated salaries.

I can't see any way this would be the right thing to do.

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(* that's an assumption. The grandparents could have appointed some third party to hold their estate as trustees until the children reach majority)

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Replying to pauljohnston:
Hallerud at Easter
By DJKL
09th Oct 2019 18:11

If the children had been left the shares I would not have an issue, but the "trustees" have a fiduciary duty here and there is a real possibility of later problems that could loom very large- everything in me screams danger.

In England do trustees require to take Investment advice re certain types of investments to be acquired by trusts, do you have restrictions on what may be held /ratios etc (apologies for my ignorance but we do have different laws so I just do not know what legal strictures bind trustees re investment decisions down south)

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By JDBENJAMIN
10th Oct 2019 10:50

I can't see any problems from purely a tax point of view, but I can see big problems from an overall legal point of view. Advise them to speak to a solicitor first.

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Replying to JDBENJAMIN:
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By Tax Dragon
10th Oct 2019 12:40

JDBENJAMIN wrote:

I can't see any problems from purely a tax point of view....

It helps if the valuations are nailed on.

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By Matrix
10th Oct 2019 13:59

Obviously you will need to address the capital gains tax implications. There will also be stamp duty.

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