Even though transferring shares to your children is caught by “anti-avoidance rules”, which taxes the parents on any dividends paid to the children, it is an area that is still worth looking into for possible tax savings.
Parents responsibility to pay tax
Everyone gets a personal allowance, including children. Some higher rate tax payers therefore come up with the idea to transfer some shares to their children to utilise their child’s personal allowance, as well as their basic rate tax band.
In essence, it’s a good idea, however, if shares in your company are transferred to your “minor” child or children (under the age of 18), in the hope the share dividend income would be subject to zero, or lower rates of tax, then anti-avoidance rules ensure that the parents are taxed as if the dividends were their own. This effectively negates any benefit.
Despite this, there may still be advantages to transferring shares to your children.
Short and long term benefits
In the short term, while your children are under 18, you should be no worse off, as any amounts paid in dividends would have been taxed on you anyway, as if you had retained all of the shares yourself.
The money can be invested by your children and any income from this would be their tax liability – it is only the dividends themselves that are taxed on the parent.
If you have surplus cash this could be a tax efficient way to provide funds for your children.
If your child/children are 18 years of age or older, they will then be taxed on the dividends themselves as they are no longer a minor. This could be advantageous where they receive dividends as long as their total income is less than the £42,385, and they remain basic rate taxpayers. This can be really beneficial if they do not currently have a job (or one that is on a low salary) and/or are still in higher education.
Don’t forget abut Capital Gains Tax
Capital Gains Tax is also a consideration though as the transfer of the shares to your children must be valued at their market value for tax purposes, which may generate a Capital Gain though this could be covered in part or completely by your Capital Gains Tax annual allowance.