Following the increase in dividend tax rates we have received a handful of enquiries regarding the possibility of introducing children into private medical companies as shareholders. There is nothing to prevent shareholders gifting shares to children, regardless of their age. However, if the recipient is a minor (younger than 18), the dividends received will remain taxable on the parents therefore eliminating the tax advantage associated with income received by lower rate tax payers.
The above does not apply when children receive shares from their grandparents. Dividends stemming from shares gifted by grandparents remain taxable on the children, not the grandparents or parents. Not only is this a useful way for grandparents to financially support their grandchildren, the gift may also reduce the value of the grandparents’ estate for inheritance tax purposes.
It should be noted that parents and grandparents may be required to pay Capital Gains Tax at the time of the gift so the transfer should be carefully managed with professional advice.
Whilst gifting of shares is clearly a useful option for grandparents, in reality most doctors in private practice have young families and no grandchildren. These doctors may still decide to gift shares to their children in anticipation of their children turning 18. Gifting a relatively small proportion of the shares on a piecemeal basis may enable the doctor to achieve the following:
- Begin reducing the value of his/her estate for inheritance tax purposes.
- Provide the children with a shareholding which may provide a tax efficient source of dividend income when they reach 18.
- Provide the children with the opportunity to utilise their annual capital gains tax exemption when they eventually dispose of the shares. This could be useful at liquidation.
- Transfer capital (ordinary shareholding) to the next generation without triggering capital gains tax (gift on a piecemeal basis to utilise the parent’s annual capital gains tax exemption).
To discuss this further, please call Matt on 01724 700226.