Friday 20th February 2009 Blog

Dividend Planning

If your client runs a limited company one way they can share dividend income around their 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 your client give shares to their children who are aged under 18, the income the children receive from those shares will be taxed as your clients own (unless income isn't over £100/year). If the children use their own money to acquire the shares it must be clear that the funds did not come from your client. Even if this is clear, the Taxman may argue that as the controlling directors of the company your client has placed the dividends in the hands of their children by arranging for shares to be issued in their names. In that case the dividend income will still be taxed on your client rather than on their children.

Giving shares to a spouse can be effective for tax purposes, although the Government is determined to clamp 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 deal with 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 your client wants family members to receive dividends in proportion to the effort they put into the business, perhaps to guard against 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.
 
Posted by: Bookcert Mentoring Team

Friday 20th February 2009

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