If you’re a shareholder of a private limited company, traditionally spreading the ownership and therefore dividends around the family offered real tax advantages, especially if you had added your children as company shareholders. Since 2019 when we first published this article, the dividend allowance has been eroded when the now distantly remembered £5000 annual allowance was reduced to £2,000. This trajectory has continued and we now find ourselves 10% of that historical rate with just £500 annual dividend allowance.
The Dividend Tax Rates have also been revised, with rates as of May 2023 being 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate). So, is it still worth having children as shareholders of a private limited company?
Your children as shareholders
There is nothing to prevent shareholders from gifting shares to their children, regardless of their age. There are, however, various tax implications in doing so. If your children are over 18, they will be taxed on any dividends they receive. Assuming they are lower-rate taxpayers, this potentially gives you an immediate tax advantage. If your children are younger than 18, you as the parents will be taxed on any dividends they receive, eliminating this tax advantage.
You can gift shares to your spouse without CGT liability, but if you gift shares to your children you may also be required to pay CGT at the time of the gift, so the transfer should be carefully managed with professional advice to ensure you keep within your CGT allowance of £3,000 for the 2024/25. This is down from £12,300 in the 2020/21 and 2021/22 tax years when I last wrote about this topic, so you can see how important it is to know the up-to-date figures before taking such a decision. You could, of course, spread larger share gifts over a number of years to avoid a large tax bill.
Your grandchildren as shareholders
If you are a grandparent gifting shares to your grandchildren, it’s a slightly different story. Although you will be liable for any capital gains tax at the time of the gift it’s your grandchildren who will be taxed on any dividends they receive (not the grandparents or parents).
It means you could play a canny hand that would not only help to support your grandchildren financially but may also reduce the value of your estate for inheritance tax (IHT) purposes.
Gifting shares and Inheritance tax (IHT)
Giving shares to your children would be considered a gift for the purposes of inheritance tax. If the transferor (person giving the shares) dies within 7 years of making the transfer, the transferee (child) will be liable to pay inheritance tax. The level of tax which needs to be paid will depend on the number of years that have elapsed between the gift being made and the death on a sliding scale known as taper relief (see table below).
| Years | Percentage |
|---|---|
| Less than 3 years | 40% |
| 3-4 years | 32% |
| 4-5 years | 24% |
| 5-6y ears | 15% |
| 6-7 years | 8% |
Inheritance tax – good news!
For gifts up to £3,000 in value. They can be made each year without being subject to inheritance tax (known as an annual exemption), so you could transfer shares in £3,000 chunks each tax year. It’s a great way to reduce your estate for IHT purposes and if the grandchildren are over 18 and not using their income tax allowance then a good way of boosting their income if dividends are paid. (see above).
You MUST transfer shares to your children for the market rate. You can’t pretend £10,000 worth of shares are worth £3,000. In this example, the £7,000 difference would be considered a gift and liable for the tapering scale as noted above.
Should you add your children/grandchildren as company shareholders?
In reality, most medics and dentists with a private practice have young families and no grandchildren. Even so, you may still decide to gift shares to your children in anticipation of them turning 18.
Gifting a relatively small proportion of your company shares on a piecemeal basis may enable you to:
- Start reducing the value of your estate for inheritance tax purposes.
- Give your children a shareholding which may provide a tax-efficient source of dividend income when they reach 18 (useful to fund their university tuition and/or living costs).
- Give your children the opportunity to utilise their annual capital gains tax exemption when they eventually dispose of the shares. This could also be useful when you liquidate the company.
- Transfer capital (ordinary shareholding) to the next generation without triggering capital gains tax. By gifting shares on a piecemeal basis you can utilise your annual capital gains tax exemption.
To summarise…All of this means that making your children shareholders in your Limited Company is still potentially tax efficient, however to a lesser extent than previously and needs to be balanced with the potential Capital Gains tax created and the administrative overhead.
There is a lot to consider, but you are not alone. Remember it’s not for everyone and certainly isn’t easy, so take the best advice you can before making any changes.
This article should not be interpreted as advice. Taxation legislation and regulation are constantly evolving. It’s therefore always wise, and good practice, to regularly review your current financial strategy and company structure with your financial adviser, solicitor and accountant.
Would you consider adding your children as shareholders of your company? Let us know by adding a comment below.
Editor’s note: This post was originally published in May 2019. It has been completely revamped and updated for accuracy and comprehensiveness in August 2024.
Hi there,
We have a limited company and both myself and my wife are share holders. I am retired now and we receive dividends from our investments in the business account. How can I make my children who are over 18 years share holders, without them having to buy any shares in my compan. This is so that when we die they don’t have to sell the dividend paying stocks and continue receiving dividends.
Hi Ian
Taxation to be considered: IHT, CGT, income tax and stamp duty (I’ve discounted this on the assumption that the shares are a “gift”.)
Inheritance tax (IHT): You could “gift” your shares to your children. There will be a potential inheritance tax liability for 7 years.
Capital gains tax (CGT): A transfer of assets/shares gives rise to a capital gains situation. Potentially you could receive “gift relief” with respect to capital gains which is a way of deferring the tax and passing it on to the recipient rather than it falling on you.
Income tax: This could arise but if it can be demonstrated that the transfer is for reason of family or personal relations, income tax may not apply.
As is always the case with a situation like this, I would approach your accountant to confirm a way forward. Beyond this, I would consult with a financial adviser to discuss all that needs to be considered.
Best wishes
Owen
Hi
I have a limited company that is not actively trading but will be soon and will also hold some investments (in trading companies). I am the sole shareholder currently and I understand the implications of simply passing shares to my child. However, can my mother invest in the business now before we start and then, in the future, gift these shares to her grandchildren without the tax issues with then paying dividends to them? Many thanks
Hi Andrew
My feeling would be that a gift of the shares would count as a “disposal” and therefore Capital Gains Tax (CGT) may be payable by the grandparent. However, if there was no gain then no tax. If there was deemed to be a gain then your mother has an annual CGT allowance which would alleviate/deal with potential gains.
There may be an IHT implication if your mother was to die within 7 years of making the gift. However there is a “gifting allowance” of £3,000pa so maybe the slow dissemination of shares to children may be a possibility also. If your mother didn’t use this facility in the previous year, then she can actually gift £6,000 in this way.
Finally – dividends – “yes” the dividends could be paid to the children without any tax implication.
I feel that the above is “specialist” knowledge and you have quite a specialist situation/scenario. On this basis I would encourage you to discuss this with an IFA such as ourselves.
Best wishes
Owen
I own -100 % of the shares in company that
let’s property owned by the company with no mortgage.
I don’t need any of the income.
Can I give a new class of shares to my 3 young grandchildren who are all under 5
How do I value the share so give them and what tax would I have to pay on the gift?
Can that new class of shares pay dividends out of the profits to the children it will be within their tax free allowance and could pay their school fees?
So profit is retained in company, say £50,000 p/a we pay 19% corporation tax p/a = £9500 tax leaving retained profit £41,500 p/a can I pay say £30, 000 dividend to the children £10,000 each leaving £20,000 retained profit each year
If I gave them the shares now but didn’t pay any dividend for a couple of years would that affect the value of the gift of shares?
Hi there
The questions that you are asking could have significant implications (Tax etc) and the answers therein would require a significant time input to ensure accuracy. You may also wish to consider setting up a trust – therefore I would recommend a formal meeting with an adviser to discuss your needs. However, everything that you suggest/imply, can be done and is possible.
I encourage you to contact Legal and Medical to arrange a meeting with an adviser in your area. We are operating telephone and zoom meetings at the moment.
Best wishes, Owen
Hi Owen,
Thank you in advance for all your advise.
I have a business, but I want to diversify and looking to start the 2nd venture.
So instead of creating a new company on my name and having 100% shares again, I put my mum (grandma) as a shareholder and my 2 young children as a shareholders too.
In that case, assuming the company is making profit, after paying 19% corp tax , can we distribute the dividends between 3 of them? (which in return means 3 personal tax allowances up to £12500 each= £37500 tax free? )
Hi there
Yes you can do this but I would check with your accountant re shares for your young children. There is no hard and fast rule relating to age BUT children below 18 are classed as minors and rates of tax will be at the parental rate!
Best wishes, Owen
Hi
Can I set up a new company: with the shares essentially worth very little as it has no income and is a start up. If those shares are owned by grandma and she decides to transfer these at her nominal cost to her grandchildren after say 6 months or less when the company is still a startup. Would there be no cgt as the shares have very little value in a start up with little or no income ?
When would the children be able to receive dividends ?
Would this also avoid inheritance tax later ?
Is there any further benefit for them by becoming directors after age of 16 ?
Thank u
Doc
Hi there,
Grandma could transfer the shares, but up until 18 the parental tax rate would apply on income generated. I feel that children need to be 18+ to be shareholders in their “own right”, i.e. with an accompanying personal allowance(s)!
If the children own shares, then it depends on when they received them and if the grantor remained alive for seven years after the gift as to whether IHT would be payable
Children can be employed from the age of 16, so whilst you may not make them directors, they could be employed, as long as your accountant was happy that they were being gainfully employed to work in the business.
Best wishes, Owen
Hi Owen
Could you clarify if children under 18 in receipt of Dividends from a company where shares were given to them by grandparents or uncles can receive them free from tax if the their total dividend & any any other income does not exceed the Personal Allowance of £12,570.
In your reply you said the children pay tax at their parents rate but do the chilldren not get PA & £2,000 div allowance ?
Gift of the shares has been accounted for to HMRC.
Hi there,
Whenever younger children are involved then there is always the chance that HMRC will take a view and decide that tax is due at the parent’s rate if they “follow the cash”. Alternatively, you could potentially make grandparents shareholders (they would receive the £2000 allowance plus other dividend monies). They could then consider gifting the money to the children as a regular “gift out of income”.
Providing this was regular, documented and in place for some time, this would normally be accepted, as all gifts made this way fall outside of the Estate from an IHT point of view.
I hope this helps!
Best wishes, Owen
Hello Owen,
Do you have the legislative reference for the minors being taxed at the parent’s rate of tax?
Hi there
Here is a link to the relevant HMRC Manual HMRC internal manual Trusts, Settlements and Estates Manual. Hope this helps.
Best wishes, Owen
what is the best way to avoid the Inheriant taxes ?
Hi there,
There are numerous legitimate ways of avoiding inheritance tax including; gifting, trusts, AIM investments, BPR registered products etc. I would suggest organising a meeting with an adviser to talk about your options.
Best wishes, Owen
Hi Owen
Would appreciate a sense check on an idea were considering. We currently have two properties, 0 mortgage, 1 residential (not main) & 1 rented, share split is 88/12% and 50/50% between parent & child respectively.
If both properties are sold and the money is used as capital to start a property company with the child (18+) as director and 100% owner, would there be any IHT/CGT implications? Presumably invested capital would be treated as a gift and subject to IHT within 7 years? What about if it’s treated as a loan instead? The plan would then be for the parent to be hired as an employee / also be minority shareholder (different class, dividend receiving only) and receive salary – instead of the previous set up where there is net rental income.
Many thanks
Dear Tony
It is quite a comprehensive plan that would need assessing, and as I am sure you can understand, not one that can be dealt with in a brief exchange. There are a lot of tax implications and we would need to fully understand what you wish to achieve. If you wish to take this further then you could arrange a meeting with one of our advisers. Feel free to contact us.
Best wishes, Owen
Hi Owen,
I have a limited company of which my wife and I are teh only share holders. We have two children who are under 16 years old. They both attend private school and we were wondering is there a way to pay for their school fees by setting up a trust fund or something which the company can contribute to their education?
Hi there
The short answer is “no”, not until the age of 18 really – possibly a little earlier; at this age, your children could become employees of the company, but your accountant (and by default, HMRC) would need to see that they actually have a role. At this age, they could be shareholders of the company through the issuance of a different “class” of shares to the ones you and your spouse/partner may have. Then your children can receive dividends. £2000 of dividends is currently untaxed, but you could potentially pay them dividends up to the personal allowance. They would then pay no tax on £12570.
You could potentially make grandparents shareholders, and then they use the dividends they receive as gifts out of income to pay school fees. However, you would certainly need to run this by an accountant, as HMRC may take a very dim view of this approach.
If you have cash in the company, then you could make it work a little harder by investing in various products that should, over time, produce bigger gains than cash in the business account. Gains would be taxed at the corporation tax level, and the money would still need to be paid out to you and your partner/spouse – so you would incur personal tax but this may be acceptable all things considered!
Feel free to contact us if you would like to discuss further.
Best wishes, Owen
Thank you Owen for the reply.
Hi, I am about one week away from opening a small business. As my husband is still working elsewhere, he will be director with me, but I will be the only shareholder. I have three children, age 12, 14 and 15. What will be the wisest way to include them as shareholders with minimum tax complications?
Hi there
Regardless of whether your husband is working elsewhere, I would probably still make him a shareholder to improve flexibility. I would consult with your accountant to outline future plans for you, your husband and your current/future financial situation – this will inform your accountant as to the best approach.
It could be that your husband is a minority shareholder in the first instance. Regarding your children – they are too young to “benefit” from being shareholders (any dividends received would be taxed at the parental rate). But it may be possible to set up a separate share class, with a view to the future. Again, this is something I would take up with your accountant.
Best wishes, Owen
Hi, I have a limited company and want to pay out the dividends as efficiently as possible. My husband and I have the same class of share so will need to have the same payout. My husband is a higher rate tax payer so he will have to pay the higher rate. My son is 17 now, (and has a different class of shares so I can pay him a different amount) I know I can pay him £2000 with no tax implications. Can I also use his personal allowance. He does not earn any other money. If I pay him more, what are the tax implications? Will he need to do a tax return?
Hi Sarah
This sounds like a conversation you need to have with your accountant. If you are paying him a salary, he will need to have a job which the accountant can discuss in detail. When your son reaches 18, you could discuss alternative share-class options as well.
Best wishes, Owen
Hi,
I have a LTD company, I hold 100% of the shares and want to add my daughter as a share holder so she can withdraw dividends to pay for her education, she’s only 3yo, I know I can’t gift her the shares, as any dividend pay out would come under my tax, if the grandparents were to buy shares in my LTD company for her as a gift, does that mean she would be able to withdraw dividends under her own tax allowance.
Hi there
Grandparents could buy shares, but they/you would obviously need to be aware of potential costs including; stamp duty and/or CGT for instance. However, assuming the grandparents own the shares, then ongoing dividends would be taxed at their personal marginal rates. They could then gift the remaining net amount to their granddaughter. However, this is not that tax-efficient!
So, the alternative would be for the grandparents to place their shareholding in trust. Dividends payable would be taxed at the trust rate (45%). BUT, as the income is effectively being distributed to the granddaughter (we assume this is within her “personal allowance”) she is able to claim a tax refund.
An example of this is as follows:
Assuming £6,000 is distributed to the granddaughter, in order to fund this, the trust would need a dividend from the company of approx. £10,909, on which it will pay £4,909 (45%) of tax, leaving a £6,000 net payment. The granddaughter would have had gross income of £10,909, including a tax credit of £4,909. £10,909 is within the grandchild’s personal allowance, and the tax credit can therefore be recovered in full.
As you can see, this is quite a complicated process (although I have tried to make it as basic as possible, and therefore it is not all encompassing) and the involvement of a trust, stamp duty, CGT, IHT etc etc. All have to be considered “in the round”.
Therefore, it is essential you seem guidance from your accountant and adviser working in tandem.
Best wishes, Owen
Hi Owen, thanks for the reply, I will have a look into setting up a trust.
Just to clarify, my parents couldn’t buy shares in my company for my daughter, so my daughter owned the shares, and could receive dividend payouts.
That way I haven’t gifted them, and any dividend would come under her tax allowance?
Hi Steve
No – your daughter doesn’t own the shares – the trust does. Your parents buy the shares and then place them in trust. Your daughter is the beneficiary of the trust, so when dividends are paid to her from the trust her personal allowance can be utilised.
Please feel free to contact me directly for any further help.
Best wishes, Owen
I am a 50-50 percent shareholder in a limited company can I give my shares to my son or do I have to offer them to my partner?
Hi there
Gifting shares may result in capital gains (for you) and possibly IHT. Unless you have a specific “first refusal” agreement, then I don’t see any reason why you couldn’t offer your personally held shares to any individual you like. I would talk to your accountant about setting up a new share class within the company (“ABC shares”). This leaves you with your voting shares but also the ability to pay dividends on other shares rather than your own. However, I strongly recommend you do this with your accountant’s advice/support.
Best wishes, Owen
Good morning I have a substantial income from a BTL business and pensions. I want to be able to generate an income for my 4 grandchildren. On studying the current Tax legislation i have found that they can earn Tax free up to the current Personal Allowance but any Dividends received on shares in my business would be taxed on their parents.
To me this does not make sense as any dividends paid have already been taxed. Similarly, what is the situation if some of my Grandchildren do not have any living Parents and my proposals are to provide for their upkeep and longer term income when they are 18 and may wish to go to University.
Hi there,
Dividends received by children will be taxed as if received by their parents, i.e.; taxed at their parent’s nominal rate of income tax. You/they don’t pay two lots of dividend tax.
In your situation, I would probably lean towards creating an additional “share class” to your existing voting share class, with the help of your accountant and financial adviser and making your grandchildren shareholders. From the age of 18, they can legitimately receive dividends, up to the personal allowance, and pay no income tax.
A great way to fund their university education!
Best wishes, Owen
Hi there!
I’m a single parent with a limited company and 100% shareholder with no option to include grandparents in any process. The company owns a small piece of land worth less than £9k which I want my 9 year old son to have for his future. I don’t have any savings and can only work part time due to my caring responsibilities for him so this is the only way I can help him financially. I am researching adding him as a shareholder. There is no money in the company so I can’t pay any dividends but I’d be grateful to know the options if we sold it at the £9k or if by some miracle a developer wanted to buy it for more. How would my son get all the money and what taxes would he/I have to pay if he was still under 18 please e.g. how do I take the money out of the company for him efficiently.
Thanks in advance.
Hi there,
You could introduce your son as a shareholder at age 18. At this age then there are potentially more options. If you sell the land now as an asset of the company, you would potentially pay corporation tax on any gains/profit made. Then, assuming that was done, the money in the company could be paid to you as the shareholder. You would then pay tax at your highest nominal rate. You could then gift the remaining resultant cash to your son at any age. However, you would need to consider inheritance tax etc.
Best wishes, Owen
I would if possible like a little advice. I have a couple of properties which I rent out and which I would like to put into a limited company and have my 2 children both adults as shareholders. I am very new to thinking about this so not sure how it would work. I believe I have to sell the properties to the company so would I give the company a loan to buy them from me.Could the shares allocated to the company then be equally distributed between the three of us. Would there be any tax implications? There are no mortgages on the properties.
Hi Susan
You’ve pretty much got the nuts and bolts of it! You will have tax to pay to transfer into the company in the form of CGT and likely stamp duty. However, once in the company your shareholders and the proportion of shares that each holds is up to you. There is no money exchanged – it is a paper exercise – one day you own the properties, and the next they are owned by the company. The money you have deemed to have given the company to “buy” the properties is a directors’ loan. You can call this back (or a proportion of it) whenever you like (assuming there is a build-up of cash from rental income in the company). It will be free from tax. You can charge your company a commercial rate of interest on the “loan” that you have deemed to have given it. Please contact me, or one of my colleagues, to discuss the other advantages of a company – pension contributions, allowable expenses etc etc.
I hope this helps.
Best wishes, Owen
If I incorporate a new company and make my minor children shareholders right from the start, would I still be taxed on any dividends paid to them before they’re 18? There would be no gift as the kids would be made shareholders on incorporation, the same as me. Failing that, if I incorporate with myself and their grandmother as initial shareholders, and the grandmother to subsequently gifts her shares to my children, would the dividends thereafter be taxed on the children or on me?
Hi Natalie,
If children under 18 receive dividends then they will be taxed at the parental/guardian rate of tax. Grandmother could gift shares or potentially receive dividend payments herself which could then be paid to children under “annual gifts allowance” and/or gifts out of income (thereby avoiding IHT). In this scenario, Grandmother would have paid tax on the dividends at her highest nominal rate.
Gifting the shares from Grandmother to grandchildren which then generates a dividend income would be taxable at the child’s rate of tax (assume zero with the attendant personal allowance in place).
Should you add your children as shareholders of your company? | Legal & Medical Investments Financial Advisers (legalandmedical.co.uk)
Also attached an old article that may well need updating but raises the question of trusts and young adults! Taxation Readers’ Forum: Transferring shares – BKL
I hope this helps.
Best wishes, Owen
This is really great advice. Thank you.
Can I ask a question. My husband and I are shareholders of a company. He earns all the income through his work as a doctor (high tax rate payer) but I do his admin. Our daughter is also a shareholder through a trust which was set up to pay her fees but due to recent HMRC guidance we are not doing this anymore. We both take basic 1k dividends from the company and nothing else.
Can you advise whether I as a shareholder (basic tax rate) can give my daughter up to 50k from the company and what tax charge would we have to pay.?
Hi there
You can take as much dividend as you like providing the company has the money to pay it and you have the requisite amount set aside to pay the personal tax. Depending on how your share proportion is set up between you, will reflect how much you receive. It’s not necessarily the case that your husband has to take a dividend at all; just as long as there is enough money in the company to be able to pay him a proportional dividend (this assumes you may have different share classes – “ABC shares” as they are sometimes referred to) if he wanted it. He doesn’t have to take it. You should run this by your accountant and they will let you know the likely tax bill.
Best wishes, Owen
As a 91 year old pensioner I am considering giving my middle aged son my Shell shares for Christmas, value around £4,000, how do I do it please?
Hi John
Ive attached a link to Shell – they explain how you can sell their shares. Managing your shares | Shell Global >
Best wishes, Owen