Parents often transfer shares in their companies to their younger children to try to avoid tax by making use of the child’s tax free allowance and lower tax rates. These attempts can of course be overturned by HMRC using ‘settlement legislation’ which means that the dividends paid to children (minors) count as the income of the parent.
However there is merit in the arrangement, as the tax that the parent pays won’t be any more than it would have been otherwise and when the child reaches 18 the rules won’t apply; the parent won’t be paying tax on the dividend and the child can potentially begin to receive a tax free income (a great help for University fees).
Capital gains tax needs to be considered when the shares are transferred, but with planning the issue can be minimised, especially if the transfers take place in the early years of the business.
Another benefit - the company can buy back the shares when the child is older or they can be sold to the parent; both routes offer tax free opportunities and can help get some very useful funds to a child.
