With children more likely to own shares today, what are the key tax implications?
Many business owners consider giving their children shares and then paying dividends on those shares, looking to take advantage of the children’s personal tax allowances.
This has become more valuable since the changes to dividend taxation that took place in April 2016, despite the reduction in the tax-free dividend allowance from £5,000 to £2,000 in April 2018.
If children are over 18, they will be taxed on any dividends they receive. Assuming they are lower rate taxpayers, this potentially gives you an immediate tax advantage. If children are younger than 18, one must not forget the settlement legislation under ITTOIA 2005 S629.
Where ITTOIA/S629 applies, the income (over £100 per annum) paid or made available to a minor child or stepchild will be taxable in the hands of parents and not treated as the child’s income for tax purposes. A stepchild includes the child of a civil partner.
At common law a child will not be bound by a contract to buy shares as they are not ‘necessaries’, so theoretically, a child could relinquish obligations placed upon them by owning shares, particularly where there are unpaid shares. Thus, normally, public companies exclude minors from holding their shares.
Sometimes it is hard for the company to attract new investors due to the restricted obligations of minor shareholders.
It may create fragmentation of control of the company. Children owning shares control part of the business. Sometimes it becomes very difficult if you want to resurrect the full control of the company, especially when they disagree with any of your proposals or resolutions.
If you are issuing new shares to a minor child, consider taking professional advice on whether you should issue the existing share class or if you should create a new share class.
ACCA has produced a technical factsheet that looks at the legal and tax implications of a child owning shares, and other circumstances in which ‘settlement’ legislation may apply.