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New Dividend Tax avoidance

New Dividend Tax avoidance

Husband and wife directors of a limited company and they have three kids aged 16 and over and living at home and studying.

With the new dividend tax they want to make the three kids shareholders

I suppose there is nothing wrong within the arrangement even though the money will probably be paid back to the parents.

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By Ruddles
29th Feb 2016 14:17

Where in the question were waivers mentioned?

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29th Feb 2016 14:21

Good point

Ruddles wrote:

Where in the question were waivers mentioned?

Completely misread that one.

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29th Feb 2016 14:19

How old are the children?
You mentioned 16 and over. Settlement legislation applies to minor children.

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29th Feb 2016 14:23

CGT? IHT ? Over 16?

Gift of shares is potentially subject to CGT[unless holdover relief applies] and to IHT with usual  7 year runoff provisions unless BPR is available.

For waiver to be effective the dividend declaration must be xp. per share, not a total of £y. Critically the dividend declared must have been legally payable without the waiver.

The fact that the children are over 16 is not the determining factor [whether or not they are in full time education]-the critical age for non aggregation with donor parent's income is 18.

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29th Feb 2016 14:40

Seems pointless

In theory the maximum saved by that method should only be £5,000 x3 x 7.5%, a grand total of £1,125, as the 7.5% will apply regardless of any other income. Edit : (could be extended to PA+ £5,000 if no other income of course).

In addition that money will actually have to go to the children. Otherwise that WOULD be tax evasion.

EDIT: In addition to their personal allowance of course (but that would still be the case both before and after). It certainly will be the case when they start earning money themselves.

Presumably the shareholder creation will be an effectively disposal of shares, so you'll need to do a capital gain calculation, and or gift relief of some desciption...yadda yadda yadda.

Oh, and each of the children will then probably/possibly have to do a tax return...

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29th Feb 2016 21:45

For HRT it's actually
A 10% saving
If an ART it's 11.3% as it's a floating allowance (forget the exact terminology)
KFK

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03rd Apr 2016 11:37

Higher Rate

andyjdicker wrote:

In theory the maximum saved by that method should only be £5,000 x3 x 7.5%, a grand total of £1,125, as the 7.5% will apply regardless of any other income. Edit : (could be extended to PA+ £5,000 if no other income of course).

Wouldn't the higher rate 32.5% savings apply to parents in the HR band?

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29th Feb 2016 14:25

GAAR

If the money does just make its way back to the parents, then it will be caught by the GAAR. If it is effectively the parent's income anyway, then simply passing it through the kids hands won't stand up to detailed scrutiny.

It might work as a way to give money to the kids which would normally have to come out of the parent's taxed income though.

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By DJKL
29th Feb 2016 16:28

Pros and cons

Pros

Save some parental costs post 18; all that money I paid for flat rentals etc  out of my after tax income could have been routed through a company at a much lower tax rate.

Cons

Offspring under the age of 25 ( My deemed age when they are considered grown up per my will) having rights vis a vis my company.

No opportunity (maybe) to vet their life partner to see if he/she is a total waste of space; an early marriage and a later divorce may mean shares (or the value of said shares) in the hands of some reptile, maybe temper thought process by seeing who (or what) is likely choice, and of course their choice may be a reflection of their own maturity.

I am sure some family business entities prosper with different generations holding equity interests, however from my experience I would not be even considering passing assets to the children before I believed they carried a modicum of maturity; the test ought to be something like whether the dirty mug they have just used offends them and therefore, when they rise from their recumbent position in the sitting room, they consider the novel idea of taking it with them to the kitchen.

Imho for most children (and I include my own, my extended family and the offspring of friends in this) 18 is a pretty young age to be  endowed with a chunk of someone else's efforts; valuing money most often develops from earning it rather than merely being granted the fruits of the labour of one's parents.

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29th Feb 2016 20:58

you need proper advice

What you are seeking to achieve might be possible - but at least one of the things you say kills it dead. And you would have to get the paperwork 100% correct.

You really need to talk it through with someone who understands the issues; preferably a professional, and one who does not make assumptions about you, or your client before he has the full picture.(he knows who he is!!)

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01st Mar 2016 08:41

Proper advice

Joe Soap wrote:
What you are seeking to achieve might be possible - but at least one of the things you say kills it dead.
It would probably be helpful if you said what you think kills it dead. Without that information, this answer is no help whatsoever.

Given what you said after this, it will be interesting to see if it is the same thing I have already explicitly mentioned.

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01st Mar 2016 08:50

I'm guessing it was this comment in the OP

I suppose there is nothing wrong within the arrangement even though the money will probably be paid back to the parents.

It's an artificial arrangement.

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02nd Mar 2016 20:43

here we go again

I did not say what kills it dead because that would be the role of whoever gives "proper advice". The purpose being to ensue that Jim100 seeks such advice.

I can't see that you said that any aspect kills it dead; although you do make reference to the GAAR.  Jim100 may not be as familiar with these terms as you are. We don't know do we? So let us not make assumptions.

 

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02nd Mar 2016 22:08

Not assuming

Jim100 has previously stated he is an ACCA qualified in practice. It would be extremely surprising if someone like that did not know what GAAR stands for.

But, even if he isn't, you have previously made it clear that you think answers should only be given that help the questioner. An answer that something kills the plan dead without saying what that something is is no use to anyone. As well as mentioning the GAAR, I have also explicitly stated that the money effectively being the parents' income is what won't stand up to scrutiny. I invite you to be equally clear on what you think the problem is (though I strongly suspect it is the same thing)

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03rd Mar 2016 10:24

GAAR

The GAAR is a General Anti-ABUSE Rule, it is NOT a general anti-avoidance rule - as the guidance notes make clear it can apply where "That limit is reached when the arrangements put in place by the taxpayer to achieve that purpose go beyond anything which could reasonably beregarded as a reasonable course of action".

Is transferring shares to children reasonable - of course it is.  Making the children shareholders is perfectly reasonable - so the GAAR could not apply to that.  Placing the shares in the children's name without their knowledge and then keeping the proceeds of a dividend - I don't think you need to consider the GAAR to spot the flaws in that one.  Gifting the shares to the children on an understanding that the children pass the proceeds of a dividend back into the hands of the parents?  If the children have income it is reasonable to expect them to make a contribution to the cost of living at home and that would take the issue out of the GAAR.  Would it be caught under statutory trust provisions? Given that the children are over the age of 16?

In the revenue's opinion, and I suspect that of the courts, there is arguably a statutory settlement if there is a legal agreement between the parties for the income to belong to the parents, but if the shares are genuinely gifted on an outright basis and the children use the income to make a contribution to household expenses - that would not fall within the GAAR.  Consider the example at revenue manual TSEM4200 -

"Example 3- gifted shares with conditions attached

Mr C is a higher-rate taxpayer who owns all the 100 issued shares in C Ltd. He wants to give his brother, a basic rate taxpayer £25,000 but Mr C’s money is tied up in the company. To avoid a higher-rate charge on dividends paid out of the company, Mr C transfers 50 shares to his brother on the understanding that the shares are to be returned to him a month later. Mr C declares and the company pays a dividend of £500 per share so that £25,000 is paid to each shareholder. The plan, under which the gifted property is expected to return to the donor is an arrangement where the donor or settlor has retained an interest in the property so the income paid to the brother is deemed to be Mr C’s under ITTOIA/S624." 

Could an outright gift of shares, without an understanding that they are to be returned at a later date (and of course in the long run from an IHT perspective there may be advantages to gifting some shares to children anyway) be within this rule without a legal condition on the return of the dividend?  Probably not.  But it would need to be a genuine arrangement, of course.

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