Children as shareholders

[Lorne]

So here's one that I can't find anything wrong with, but that my accountant just says won't work:

I'd like to make my 2 children shareholders in my ltd company so that I can pay them some dividends and they can use their tax allowances. Like adults, children have a tax allowance. Of course if they use the money for anything other than themselves then it will become a benefit in kind to me and I'll have to pay tax on it. So I'm going to let them spend the money on whatever they like without any restrictions - they can save it, spend it, buy a tonne of sweets or anything else they like.

Is this legal? I think it sounds like it is completely legal.

The other thing I'm going to do is take them out of their private school, which is costing me a small fortune each year, and plonk them in the local comprehensive.

Now, it's entirely up to them if they want to stay at their private schools and pay the fee's themselves. They'll now have some income after all, and I guess there's only so many sweets you can spend it on before you start looking for other outlets. It's completely up to them if they want to go to the local comp or not, but if they decide to spend their income on school fees then they will be paying for it out of their own pre-tax income.

You'll probably immediately say 'foul!' 'it's obviously a benefit in kind just structured in a way that sounds like it isn't'. But think about it for a minute - what benefit do I actually get from my childrens education? Surely the only people that will benefit from it is them. My parents haven't benefited at all from my own education (at the local comprehensive) or from the years of work and hardship I put in to getting a degree all those years ago. It's not like I pay them an allowance or anything now that they're old, so what on earth do I possibly benefit from in my own childrens education?

[northernladuk]

Here is a pretty black and white answer in this mail...

http://forums.contractoruk.com/accou...reholders.html

S660 puts the mockers on this idea I am afraid.

[eek]

The first flaw is that children don't have tax allowances.

The second flaw is that children can't hold shares directly (they need to be held in trust).

Apart from those two flaws I can't be bothered to think of any others but I bet there are a few hundred more.

[Lorne]

Direct.gov.uk says:

Tax on children's income
Your children have a personal tax-free allowance each year (£7,475 for the 2011-2012 tax year). They can have income (including interest) of this amount in the year without paying any tax.

And I'm pretty sure that it doesn't count as income shifting under s660 if I simply give them the shares and let them do whatever they want with the income it generates

[Lorne]

....and, not that it would be any of the governments business how I run my company, but since it's a high tech engineering business that relies on well educated staff, it really would be in the future best interests of the company for the next generation to actually be able to understand engineering. Giving them shares in the company is the ideal way to foster this interest.

[Greg@CapitalCity]

And I'm pretty sure that it doesn't count as income shifting under s660 if I simply give them the shares and let them do whatever they want with the income it generates

I am afraid it does. A gift to a minor child is caught by the settlement provisions, except that the first £100 of income is exempt and treated as the child's own. Copeman v Coleman [1939] is a good example.

[eek]

Direct.gov.uk says:

Tax on children's income
Your children have a personal tax-free allowance each year (£7,475 for the 2011-2012 tax year). They can have income (including interest) of this amount in the year without paying any tax.

And I'm pretty sure that it doesn't count as income shifting under s660 if I simply give them the shares and let them do whatever they want with the income it generates

Its a shame you didn't read the second half of that

£100 rule
There are special rules if a parent has given savings to their child. Where gifts from a parent produce more than £100 gross income a year, the whole of the income from the gifts is taxed as the parent’s income. A child cannot claim back any tax on that income. Nor can interest be paid without tax taken off.

The £100 rule applies to young people until they reach eighteen or marry (whichever comes first).

The £100 rule applies separately to each parent. It does not apply to gifts given by grandparents, other relatives or friends.

See an example of the £100 rule.

I am aware of someone who got caught out on that a few years ago when he gave his children part of his shop (the mail order side).

As that business already existed HMRC didn't accept the argument that the 8 year old was the sole person running that part of the business.

[northernladuk]

Direct.gov.uk says:

Tax on children's income
Your children have a personal tax-free allowance each year (£7,475 for the 2011-2012 tax year). They can have income (including interest) of this amount in the year without paying any tax.

And I'm pretty sure that it doesn't count as income shifting under s660 if I simply give them the shares and let them do whatever they want with the income it generates

My dads children have a tax allowance as well... get me? Need to start thinking about ages not just the generic term children, makes a big difference.

[psychocandy]

Somehow I dont think HMRC are going to go for the - its their money and they can spend it on what the want argument. Seriously think that they're going to believe this?

You might think thats a way to do but if you could do this then it'd open the floodgates for tons of abuse. For instance, could I make my cat a shareholder and then let him decide if he wanted to spend the money on food, cat treats, toys etc?

After all, feeding my cat has no direct benefit to me, has it?

Nice try but no way in a million years are you going to get away with this. HMRC tried their best to stop income shifting between spouses but got defeated in the Arctic case, so you can bet they aint gonna let any other sort of income shifting through!

[malvolio]

Like I said in the other thread, your kids - no matter how old - will fall under the connected persons rule, which apllies to any family member other than your spouse. So it is entrirely legal to gve them as much of your income as you wish, by whatever means you wish - as long as you personally pay the full PAYE and NICs due against it first. I suspect that was not the general idea...