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Minors as shareholders - am I missing something?

Taxed on the parents

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Hi all,

I have just taken on a client who had prevously used one of the 'Big four' as their advisors until now. There shareholding set up is that the shareholders include the children of the founding shareholders. They range from 3yrs old to 16.

I have always been of the understanding that this was not possible or although it may be possible there are no tax savings becuase the dividends would be taxed on the parents

The children all do tax returns and these are signed by the parents and their income is quite substanstial

Am I missing something? This set up was put in place by my predecesors who as per the above are not no small practice!

Replies (14)

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By Cloudcounter
12th Dec 2019 17:30

Where did the money for the children's shares come from? If it was a gift from a grandparent, for example, then the income wouldn't be taxed on the parent. If the shares were a gift from the parent, then your take on things would be correct.

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By Tax Dragon
12th Dec 2019 17:36

That's the argument.

Against it HMRC could easily point out that (as Arctic Systems confirmed) if the parents take a low salary they are making a settlement. This would (IMHO) lead to the children's dividends being taxed on the parents.

Of course, there's an "if" at the start of that, but Arctic would be on HMRC's side if, say, a non-shareholder, non-family director would be paid more. HMRC really ought (again, IMHO) to start to use the weapons that Arctic gave them with more effect. Or at least realise that Arctic gave them weapons.

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By johngroganjga
12th Dec 2019 17:31

The dividends are only taxed on the parents if the shares were transferred to them by the parents. If by someone else - e.g. grandparents - it's not the same. You don't mention how the children acquired them.

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By JDBENJAMIN
12th Dec 2019 17:35

If the shares were gifted by the parents, then the dividends would still be taxable on the parents. However, if the children were genuinely founding shareholders (did a trust pay for their shares?), that might be different. You need to get back to the previous accountants and ask their rationale.

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By Matrix
12th Dec 2019 17:44

Do the kids retain the cash?

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By Tax Dragon
12th Dec 2019 17:46

My money's on them using it to pay a parental liability. School fees, perchance?

I'm interested you think that that's relevant, because I've been 'corrected' in this forum for suggesting that.

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Replying to Tax Dragon:
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By atleastisoundknowledgable...
12th Dec 2019 19:32

I had a conversation with Giles @ PTP about this a year-or-two ago. He suggested that if the money was used for something relating to the child - school fees etc - then it wouldn’t be taxable on the parent. That is assuming that it wasn’t a low salary high div type company as noted by Tax Dragon above.

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Replying to atleastisoundknowledgable...:
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By Tax Dragon
13th Dec 2019 09:11

Technical (?) challenge for you then atlea.

Why is it 'OK' for dividends to go to minor children and be used to pay parents' liabilities, but it's not OK to use a 'friend' in place of the minor children? The very suggestion prompted open laughter in this thread: https://www.accountingweb.co.uk/any-answers/can-i-add-shareholder-to-avo...

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By atleastisoundknowledgable...
17th Dec 2019 16:48

I think that the laughter on the other thread was based on the assumption that you can control the money given to your child, but not to a friend.

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By Rammstein1
13th Dec 2019 11:16

If some of the shares were transferred some years ago, the Annual Return could tell you who transferred them to the kids.

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By Tax Dragon
13th Dec 2019 11:40

Companies House records are not very helpful where trusts are involved.

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By SA2016
13th Dec 2019 14:19

Thank you for all your answers to date.

In hindsight, there are three generations involved here so I need to check who they were transferred from.

My concern is that there is an A & B share structure in place, as a made up example it looks like this

Grandad owns 200 A shares
son owns 80 B Shares
Grandson owns 20 B shares

However, the income is split 50% GD, 40% S & 10% GD so although it was GD who transferred the shares it is actually the son who is showing less income. No dividends are paid direct to GS, instead an adjustment is made to the sons DLA.

The DLA includes private school fees paid by Dad for son.

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Replying to SA2016:
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By Tax Dragon
13th Dec 2019 16:08

Your nomenclature is unhelpful - son in one breath is Dad in the next.

That point aside, it sounds as if GD receives the divs as trustee for GS. The trust might not be bare - find out about it.

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Replying to SA2016:
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By Tax Dragon
14th Dec 2019 10:57

Just reread this thread. It was still open on my machine. Schoolgirl error.

I think I've just twigged what you meant by

SA2016 wrote:

My concern is that.... it is actually the son who is showing less income.

Your thought was that receiving less income meant son was making a settlement. [I didn't twig before because your made up bit is all to cock[***] again. Son seems to have 27% of the shares but get 40% of the income. That's not "less". Perhaps if you stopped making it up and gave is the facts, you would be clearer and we could all help more.]

I agree your point in principle though. As I said above, Arctic considered this "less income" point in the context of low salary and confirmed this to be a settlement. Low salary is below market rate. In an accounts disclosure context, I have heard the argument that £8 to 10k is a market salary for owners of private companies. Whether this is right or wrong for the accounts, it cuts no tax mustard against the Arctic case. If you are in that scenario, your client is at risk of liability to tax.

Your concern re "less income" in the context of alphabet shares and dividends seems to me to be justified too - though I think in your (made-up-and-all-to-cock[***]) scenario, you'd be OK, as son and GS have the same class of share.

But say son and GS had different classes of share and son controlled dividends as director. What then? (This could obviously happen on some Awebbers' clients; your Big 4 advisor has avoided that trap.)

You also would not want son to be disclaiming dividends. Obviously.

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