Dividend Planning
Newsletter issue - February 09.
If you run your own company one way to share the dividend income around the family is to ensure that each family member owns some shares in the company, so they can receive dividends voted on those shares. This can help to reduce tax bills.
The individuals need to use their own money to subscribe for the shares, or they must receive the shares as a gift from another shareholder. However, if you give shares to your children who are aged under 18, the income the children receive from those shares will be taxed as your own (unless income isn't over £100/year). If the children use their own money to buy the shares it must be clear that the funds did not come from you. Even if this is clear, the Taxman may argue that as the controlling directors of the company you have placed the dividends in the hands of your children by arranging for shares to be issued in their names. In that case the dividend income will still be taxed on you rather than on your children.
Giving shares to your spouse can be effective for tax purposes, although the Government is determined to crack down on the manipulation of dividend income by family companies, which they see as tax avoidance. However, the proposed income shifting legislation that was to attack family dividends has been shelved. So for now this type of planning can work but it may re-emerge as an issue in the future.
It may be you want family members to receive dividends in proportion to the effort they put into the business, perhaps to protect yourself from income shifting legislation should it come into force. One way to try to do this is to issue various classes of shares, such as: A-shares, B-shares, and C-shares, known as alphabet shares. A different level of dividend is voted for each class of shares. The shares may also have different rights with regard to voting and assets allocated on the winding up of the company. However, issuing alphabet shares is not completely straight-forward, particularly if the shareholders also work for the company, so please ask our advice.
For help with all aspects of dividend tax planning please talk to us first.