paying children dividends

[athens]

Hi, I wondered if anyone out there knows the law on paying children dividends as shareholders in a limited company. I have seen two accountants, one says yes you can pay your children dividends as shareholders once you have paid CT and that this is legal. (in essence you then use their bank accounts to pay for items within your family) The other one says not! The second one says if you did do this, you would have to use a trust structure and the trust could pay for certain items for the children, but that the tax would not be favourable.

It would be really helpful if any tax lawyers out there know if this is legal, albeit unconventional as a legal tax avoidance measure. Thanks

 

[mookgirluk]

The second accountant is correct. Minors should not be shareholders in a Limited company. Being a shareholder gives you a percentage control of the company and entitles you to vote on matters, any such decision given by a minor would not be deemed valid. The best way to avoid this is that shares are held and managed by a trust.

 

[athens]

Thanks very much. I'm now wondering whether I got v bad advice from Accountant 1, as he also said you can only pay dividends quarterly and a ltd company cannot use a house as premises. Acountant two said quite the opposite! She suggested using the house as premises and that there was a structure to avoid CGT. Blimey - it's a minefield out there!:|

 

[Williams lester]

Thanks very much. I'm now wondering whether I got v bad advice from Accountant 1, as he also said you can only pay dividends quarterly and a ltd company cannot use a house as premises. Acountant two said quite the opposite! She suggested using the house as premises and that there was a structure to avoid CGT. Blimey - it's a minefield out there!:|

If you have a look at the accounts section of this forum, there is a sticky on how to choose an accountant.

 

[David Griffiths]

There is one provision to be wary of when giving minors shares in limited companies. If parents gift an investment to minor children, then the parents will be taxed on any income arising from it. That's under well established current rules.

It's also the kind of situation that the Revenue have threatened to attack using income shifting legislation. That was supposed to be introduced after they lost the Arctic Systems case but has been put on the back burner for a while, possibly because the original planned rules were so subjective as to be unworkable in practice. However, I'd be surprised if they didn't have another go in future.

 

[athens]

Thanks very much.

 

[athens]

Hi everyone, I am now consulting a tax lawyer. The two Accountants I saw, who are both fully qualified and experienced have given me conflicting advice and both swear they are right. Children can be shareholders in companies, so I need to know whether they can be paid dividends. The Arctic case was a husband to wife, so I need to know whether there are test cases for children.

It is not gifting using this structure. Children can work - ie child actors entrepreneurs and pay tax after a personal allowance. I'll faithfully post the tax lawyers reply so others can benefit from it!

 

[Zeno]

Hi everyone, I am now consulting a tax lawyer. The two Accountants I saw, who are both fully qualified and experienced have given me conflicting advice and both swear they are right. Children can be shareholders in companies, so I need to know whether they can be paid dividends. The Arctic case was a husband to wife, so I need to know whether there are test cases for children.

It is not gifting using this structure. Children can work - ie child actors entrepreneurs and pay tax after a personal allowance. I'll faithfully post the tax lawyers reply so others can benefit from it!

You are barking up the wrong tree - you are gifting the shares to the children as David suggests unless you are going to be deducting the markey value of them from their pocket money.

The point is that they can hold the shares and be paid dividends on them (dividends are paid in reference not the shareholding and nothing else) but these dividends will be taxable on the parents.

If I were you, i would not waste my money taking it further.

 

[st99015207]

Couldnt he issue a different class of shares that gave no control or voting rights?

 

[athens]

Thanks guys. The advice is clearly so conflicting I thought I'd ask the tax lawyer for test cases. It seems that the Artic case of husband's company issuing shares and then dividends to wife was found in favour of Arctic. Therefore, why can't the same argument be used for a minor share holder ( non voting) to be given dividends? The difference between this model and gifting is something I need to understand the legal implications of.

On another note, isn't it worrying that Accountant One has set up this structure for loads of his clients- if it is incorrect- HMRC will really have a field day.
Thanks for the commenst about dividends and house under licence to company - i'm going to do that. Again Accountant one said that wasn't possible - £10 week max!!
I will post outcome from tax lawyer as this minefield will crop up for others wanting to set up ltd companies.

 

[David Griffiths]

The Artic Systems case hinged around the point of whether the company director was artificially creating distributable profits by taking an uncommercially low salary. The Revenue attacked this by using some legislation on settlements (trusts) brought in in the 1930s or thereabouts.

In fact, iirc, the Revenue actually won on that point, but lost because there is an exemption for transfers between spouses. That wouldn't be available for transfers from parents to children.

But that's not the main point here. If the children get investment income as a result of assets gifted by their parents, then that income is taxable on the parent. It doesn't matter if that income is interest from a bank or National Savings, dividends in ICI or Microsoft, or dividends from a family company. It also wouldn't matter if the children bought the shares from their pocket money (a likely story!) because the pocket money came from the parents. If the case is picked up by a sceptical inspector, it can take a lot of dealing with,

If the money clearly came from somewhere else, that would be different, but there are as you might suspect rules to prevent reciprocal arrangements or simply moving it round in circles.

Outside of the tax position there could be other complications when the children get to 18, particularly if there was a bust up and family argument.

Frankly I wouldn't advise my clients to bother with such a route when there are other ways to minimise the tax burden

 

[athens]

Thanks David. It is another odd aspect of tax then. The concept of a limited company is that is seen as separated entirely from the parents and their income. Clearly, a husband can pay a wife in dividends and vice versa. Children can be shareholders, children can earn income, but your understanding is that the parents would be taxed on childrens' dividends.

I'll post any feedback from the tax lawyer or of any other facts I may glean to help others in this position. Thanks again for posting.

 

[Mike_999]

Did anything come of this as I have exactly the same issue - a company where I want to pay dividends to my minor children.

Children received a personal tax allowance like adults so the first slice of income is tax free. So with two or three children the tax free slice builds up to something substantial. If the adults gift the income bearing assets to the children then the first £100 child income is tax free with the rest being charged to the parents. But if grand parents or others gift the assets then the child gets their full personal allowance on income earned.

So parents giving children shares is tax ineffective. Trust income still gets heavily taxed so not ideal.

I went to a tax seminar by a medium sized firm tax advisors who pushed this as a tax efficient method...Could special B shares be allotted by the company to the children? Dividends could then be paid to the children?

Its a close company so does issuing shares to children count as an act of the parent if the parent owns the company?

Would you know if the tax lawyer confirmed wherether this was legal or someother approach? The tax accountant seemed to think so.

 

[athens]

Hi Mike,

Not yet, but I think I will pursue it. Accountant A swore blind you could do this, but Accountant 2 said it would be picked up by the Revenue and regarded as Income shifting. I tried to understand the blurb on the HMRC website, have a look there - seems to imply you can't.

It is upsetting that both Accountants claim to be top of their tree but gave opposite advice on several different points, not just this - seems like it is hard to get the facts. One of my children turn 18 in November so he will no longer be a minor - so I decided to make him a shareholder and pay him dividends. I am unsure yet how to play it with child 2 who is 13. I will post once I've consulted a tax lawyer, but let me know if you get any further. That's two Accountants between us who have said yes!! Good luck!

 

[David Griffiths]

Revenue's position here backing up what I have said, and what Zeno said.

This is true of any investment income arising to minor children as the result of a gift.

If the dividends come from shares in a family company, then the Arctic Systems situation kicks in. As I've pointed out above, the Revenue actually won on the question of a settlement because the main working director took an uncommercially low salaryt, but it didn't produce any tax for them because of the exemption for the spouse.

 

[Mike_999]

Thanks for your help - from this blog I googled and read the House of Lords judgement on Artic and also took a look at Mumsnet (thought they'd have looked at this given kids would be part of the scheme).

HMRC position is that any scheme to divert income by a tax payer makes the income to be that of the tax payer whatever the scheme. The H of L judged that there is a specific statutory exemption applied to ordinary shares carrying voting rights + an element of risk to capital that are alloted to a spouses even if the reason for issuing the shares is to reduce tax. The wording of the exemption does not apply to any party other than spouses - ie. shares issued to children where it is anticipated there might be a tax saving would be caught as a scheme even if the tax saving was not the primary motivation - someone would need to challenge HMRC in the H of L to override this. It would need a trust to put the income out of reach of the children.

Overriding is IR35 so if the income is derived from providing a personal service there is no hope of issuing shares in the company to children to pay them dividends - the cash recieved from customers is caught as a deemed payment and subject to NI and PAYE before the dividend is paid. I talked it through with HMRC for 20 minutes following various research and (even though they would say it) I think they are probably right.

In the round, IR35 is a blunt instrument and makes it more tax efficient to be a 9 to 5 employee than trying to set up a business for a profit motive. What a mess of a tax system the UK has sleep walked into.