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Setting up new company and gifting shares to kid

Parents or Granparents

Afternoon,

A client is incorporating his property portfolio.  His intention was to have his parents set the company up and then gift shares to him (82%) and 6% each to his three young kids aged 6, 8 and 11.  Dividends would then be distributed according to shareholdings to the kids avoiding the parental settlement implications. Seems perilously close to tax avoidance to me - associated operations?

Anyone know if this would 1) definitely work 2) work until he got caught or 3) not work at all?

Cheers,

KFK

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04th Dec 2018 16:45

It looks like it's still caught by the settlement legislation to me. The transactions are designed from the outset to try to artificially navigate round the legislation and so are caught.

The answer is probably still 2 rather than 3, but it wouldn't be hard to catch, HMRC need only give it the most cursory of glances.

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04th Dec 2018 16:50

He does this at his peril.

Advise him of the risks, light blue touch paper and stand well clear.

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By DJKL
04th Dec 2018 17:03

How does company get his properties?

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to DJKL
04th Dec 2018 17:14

Not my job, a 'friend of the family' is taking care of it...I assume he is selling the properties to the company and being owed the money. I will find out more next week.

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to KungFuKipper
04th Dec 2018 17:22

KungFuKipper wrote:

Not my job, a 'friend of the family' is taking care of it...I assume he is selling the properties to the company and being owed the money. I will find out more next week.

I'm struggling to reconcile "client is incorporating his property portfolio" with "his parents set the company up and then gift shares ...".

Is he anticipating incorporation relief??

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to DJKL
04th Dec 2018 17:14

Not my job, a 'friend of the family' is taking care of it...I assume he is selling the properties to the company and being owed the money. I will find out more next week.

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By DJKL
to KungFuKipper
04th Dec 2018 17:36

Well selling Investment property to the company has some significant tax considerations re potential CGT and SDLT ,not forgetting issues with banks etc/legal costs etc.

There would need to be some pretty compelling reasoning to do this, imho.

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to KungFuKipper
04th Dec 2018 17:59

KungFuKipper wrote:

Not my job...

Don't kid yourself.

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04th Dec 2018 17:41

I would most certainly ascertain how the properties are being transferred. ‘It’s being sorted by a family friend’ wouldn’t cut it with me. What do they have to hide?

Especially if you’re the one completing the limited company accounts and the client’s personal return, you will have to ascertain how the transaction was structured to ensure you can do your job properly.

Does your client really want a 6, 8 and an 11 year old having potentially £1,000’s of dividends. Once they work out it is their money, it could cause some family relationship issues...

It amazes me the lengths some go just to save some tax!

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04th Dec 2018 17:49

Subsidiary questions: does DoTAS apply to friends of families? If you are aware of the 'scheme', do you as a professional have obligations under DoTAS?

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By Tornado
04th Dec 2018 18:25

The key thing about children owning shares in a Company is that there has to be evidence that they paid for the shares themselves out of their own money in order for the ownership of the shares to be valid. Gifted shares will not pass this test and you don't really want to find that out many years down the line.

This is a complex situation and will vary according to circumstances. Informed advice should be taken to avoid problems later.

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to Tornado
04th Dec 2018 19:10

Tornado wrote:

...there has to be evidence that they paid for the shares... in order for the ownership of the shares to be valid.

Says who?

On reflection, I don't think DoTAS is in point. No tax is being saved, let alone avoided. As set out, it's a stupid plan that probably won't happen.

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By DJKL
to Tax Dragon
04th Dec 2018 19:27

Tax Dragon wrote:

On reflection, I don't think DoTAS is in point. No tax is being saved, let alone avoided.

Yep, seems to be more a tax generation plan for the benefit of a P Hammond and friends (if they survive long enough that is, still the other lot will be equally grateful for the dosh)

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to DJKL
05th Dec 2018 07:16

Agreed. Even so, I may have to retract my retraction. There's clearly a tax avoidance scheme afoot. Does it matter, for DoTAS, that (pending further explanation/correction to what the OP said) the scheme does not get close to working?

Oh OP... it's a (3) from me. You knew that already though.

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to Tax Dragon
05th Dec 2018 16:23

It is interesting, I don't think the relocation of existing assets is anything other than a simple sale to the company as they intend to expand their empire. The company would be set up with no assets and then grow, slowly.

There is a scheme out there which looks to transfer the assets into a partnership and then onwards to a Limited Company - but don't think they are intending to use this and never gave it much thought (supposed to save SDLT-I think we all know how that normally ends).

If I had to guess I would say the idea is that the dividends are to be accumulated for the girls' education and they are attempting to provide for this tax efficiently. Personally I was coming down on option '2' - they may well get away with it, but could be in for a long protracted argument with HMRC down the line.

Think I need to ask more questions of the client and family friend.

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By DJKL
to KungFuKipper
05th Dec 2018 16:35

So if they sell the assets to the company they trigger CGT latent within same, if they try incorporation relief under s162 the catch is who are the shareholders in newco, does not seem to work, that is even if existing portfolio qualifies as a business.

All along we presumably have minor children who may, when not minor, lead a life very different to that envisaged by the parents, yet parents feel that vesting them in some assets now is a really smart idea to save a few quid on dividend tax.

The parents have a very different viewpoint on how to parent from my own.

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to Tornado
10th Dec 2018 11:05

'..there has to be evidence that they paid for the shares themselves out of their own money in order for the ownership of the shares to be valid...'
At what point does ANY 'gifting' of shares become, or even be permitted to be valid..? (.. & how does this work or apply in cases of shares left in wills, or genuinely gifted from other family members/business partners to related & non-family-member 'children'..??)

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10th Dec 2018 11:02

It's 3 - the arrangement is a settlement and the parents are party to it (plus all the other adverse tax issues that have been mentioned by others). Remember too that the settlements legislation is a self assessment obligation so it'snot a case of waiting for HMRC to take the point - the client has to take a view when signing the return...

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10th Dec 2018 13:07

1) Your comment implying that "Tax avoidance" is somehow improper is out of order. A taxpayer is still entitled to so order his affairs as to pay minimum tax. Just because HMRC do not like it, does not mean it is wrong.
2) clearly substantial values may be involved. Your prudent action as a General Practitioner is to seek advice from an acknowledged expert. For which your client may have to pay.
By your own words you are not expert in this matter. Sculling round Accounting Web will not do.

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to David Gordon FCCA
10th Dec 2018 18:39

I am not seeking anything other than a 'direction of travel' - I am not looking for specific advice but opinions that may help me to decide what to do next. A conversation really, on a difficult subject raised by a client - I think my advice in this case will indeed to be to refer through to a specialist.

Regarding the improper nature of tax avoidance, I did not realise I had implied any such thing.

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to KungFuKipper
11th Dec 2018 06:58

KungFuKipper wrote:

I am not seeking anything other than a 'direction of travel' - I am not looking for specific advice but opinions that may help me to decide what to do next.

That's easy. Find out what is proposed. At the moment you are guessing. And probably guessing wrong.

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10th Dec 2018 13:31

You seem to be implying that he is doing something wrong, in which case I would say it will work until he gets caught. However, without any detail about the current situation, what he is intending to achieve and how he plans to go about doing it, it is hard to say whether or not he is doing anything wrong. It would be interesting to know a bit more detail.

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By ctaguy
10th Dec 2018 20:52

Sounds like your client’s parents own a company. This company is going to acquire your client’s property portfolio. Do you know how it plans to do this?

If consideration is by way of shares, won’t your client therefore receive consideration shares such that he would become the controlling shareholder? In which case would it be he who would end up gifting the shares to his own kids anyway?

Could be an expensive exercise.

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By pverco
11th Dec 2018 21:18

Assuming the property transfers are at market value, and would have been done anyway as part of the business of the company, and all taxes CGT, SDLT are paid, I doubt it would be seen as a scheme.
The most difficult part is properly settling a trust on the parents and children. Done incorrectly, it could leave all parties with a very onerous tax structure. Specialist advice would certainly be recommended. I would also think about AML with regards to funding the purchases.

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