In a further focus on tax paid by owner managed businesses, HMRC has issued a Spotlight inviting disclosure of any tax planning schemes involving issuance of shares that pay dividends used to fund school fees. 

HMRC believes that the planning doesn’t work and is caught by specific anti avoidance legislation. The disclosure HMRC invites includes “anything similar” to the planning scheme they say they are aware of. A link to the Spotlight is attached here for further information.

We have provided below some guidance on which types of school fee planning arrangement do not usually cause a problem, and which types of arrangement may bring about potential tax issues to consider.

In broad terms, the settlements legislation (a tax law that aims to prevent high earning taxpayers from making use of the tax allowance of a lower earning spouse, partner, family member or friend) can apply where an individual enters into an arrangement to divert income to another person and the individual or their spouse retains an interest in the income/asset given away, or the income is paid to their minor child. Where these rules apply, the individual who made the arrangement is taxed on the income.  This means that if a parent, for example, gifted shares directly or indirectly to their minor child with the aim of giving the child dividends from which to utilise their individual tax allowances and give them cash to pay school fees, then the parent can be taxed on any dividends received on those shares regardless of no longer owning them.

However, the position is often more complex, because individuals may have used a variety of different ways to achieve a similar result (that of the payment of dividends to children to make use of their tax allowances). Some of these scenarios may not cause any problems, while others may need the structure reviewed to ensure it is in line with legislation. The examples below are brief summaries and there will be exceptions where issues may arise even in what appears to be a benign scenario.

Common Scenarios which do not generally cause a tax problem:

• Gift of shares to adult children – where parents (or grandparents) have gifted shares to adult children (over 18), this would not fall foul of these rules unless other planning was undertaken at the same time. 
• Gift of shares to a Trust for the benefit of adult children – again, this is not an issue provided the settlor and their spouse are excluded from the trust. 
• Grandparents subscribe for shares at full market value – provided the grandparents pay full market value, then the settlements rules referred to above should not apply. 
• Grandparents have historically owned shares and gifted these to minor children or into trust for minor children – where grandparents have founded a business, they may retain shares in the Company. They can gift these shares to their minor grandchildren or a Trust for the benefit of the minor children without causing an issue with the settlements legislation, even if income flows to the minor children. 
• Gifts to minor children who have now turned 18 – where the income paid on the shares arises after the children turn 18, there would not generally be an issue with the settlements legislation. However, there could be historic issues to consider if dividends have been paid to children before they turn 18. 

Common Scenarios where there may be tax issues to consider:

• Grandparents subscribed for shares at less than market value – where parents have founded a Company, they may ask the grandparents to subscribe for shares in the company which can then be gifted to the minor children. Where the grandparents do not pay full market value for the shares, then there could be various tax issues to consider, and the parents may be taxed on any dividends paid to the minor children. 
• Parents have gifted shares directly to their minor children – any dividends paid on these shares will be taxed on the parents. 
• Dividend Waivers – where one shareholder waives their right to a dividend and dividends on other shares are paid to the shareholder’s spouse or minor children, then the dividends may be taxed on the shareholder who waived the dividend in certain circumstances.  
• Shares gifted to spouse which do not have voting/capital rights – gifts to spouses are usually out with the settlements legislation. However, where the gift is substantially a right to income (i.e. shares with no capital or voting rights), then the settlement rules can apply. 

There are also other tax issues to consider with shares, such as Capital Gains Tax, Inheritance Tax and Employment Related Securities, and so care is required when implementing any tax planning of this nature.

This is a complex area of tax planning and it’s important to stay on the right side of the law, so you should always seek professional advice for your specific circumstances.

Get in touch

If you would like help with dividend or remuneration planning, or if you are concerned that you may have implemented a scheme in the past which may fall foul of these rules, our specialist Private Client Tax team is on hand to help. Please get in touch with me, Philip Jamieson, or Nicola Horsburgh.