Spreading profit tax in family companies

When running a company, family or otherwise, effective tax planning can help you out a lot. Tax avoidance, while not exactly illegal, may raise a few eyebrows at the HMRC, but that’s far from the only way that you can effectively manage your tax efficiently to ensure maximum gains. One option seems particularly viable for family companies.

Giving shares to children

Tax avoidance may not be illegal, but it is generally frowned upon by the HMRC. Thankfully, giving company shares to your children  does not count as that and can actually be a great means of effective tax planning. By performing this type of operation, you can generally save on taxes while still not violating any of the HMRC’s anti-avoidance policies, known as “settlements legislation”.

This applies only to children younger than 18 (or 16 if they’re married). Should you transfer any company shares to them, the settlements legislation applies to all dividends that they get paid – as a result of this, the dividends are treated as  your income from the point of view of tax. It may seem like this should be detrimental to your tax, but the truth is that this gives you more long-term advantages. Thanks to this, it is not considered to be a form of tax avoidance.

The long-term result of this is that, after your children come of age and the settlements legislation no longer applies, the dividends are no longer taxable on you and become part of your children’s taxable income. At this moment, if the tax rates you pay on dividends are higher than the tax rates your children pay, you have saved on taxes.

A more short-term solution

There are two basic options for you if you’re looking for a quicker way to save on tax. You’ll still have to pay tax on your children’s dividends until they come of age, but you can either accept the tax bill or create more separate classes of share, which will allow you to not pay dividends until your children reach adulthood and are, in turn, liable for tax.

Do keep in mind, however, that by giving your children some of your shares or creating a new class of shares to give to your children, in the eyes of HMRC, this is treated as if you had sold part of your company, which will land you a CGT bill. The best way to profit from all this is to give shares to your children at the earliest stages of your company’s operation, before it has managed to build up profits. This will help avoid valuation arguments with HMRC, so your CGT will be much easier to predict.