New announcement. Learn more

CHARTERED ACCOUNTANTS (ICAEW)

News and advice to help make your property business a success

LANDLORDS FINANCIAL BLOG

All

Landlords Tax Property Tax Landlords Tax Returns Landlords Accounts Property Tax Return Property Accounts Landlords Financial Landlords Accountant Tax Tax Returns VAT Chartered Accountants Online Accountant Online Bookkeeping Online Tax Returns Your Online Accountant Your Online Bookkeeper Businessadvice HMRC Accounting Expenses FHLs NIC SDLT Dividends Property Cashflow Investment Property Tax PAYE Property Accountant Smallbusiness Tax Implications Tax Relief Businesstips Capital Gains Tax Cgt Furnished Holiday Lettings Ihtexemptions Income Tax Inheritance Tax Making Tax Digital MTD Pension Sole Trader Taxplanning Capital gains tax property Employment Allowance Gifts Holiday Lets Tax ISA Landlord Repairs National Insurance Property bookkeeper Property Letting Relief Taxreturn VAT invoice Agricultural Property Relief Allowable Business Expenses Annual Exempt Amount Bad Debt Tax Relief BADR Benefits in Kind Business Entertainment Business Expenses Business Rate Business tips Capital Allowances Capital Gains Cashbasis Child Benefit Commercial Property Compliance Deductibleexpenses Directors Loans Disincorporation Entertainment Finance Financialmanagement Flat Rate Scheme HMRC complaints Interest Interest Rates Lettings MakingTaxDigital Mileage Allowance Mobilephones MTD Update Overlaprelief Partnership Partnershipbusinesses Payrolling Pensioncontributions Ppr Property Company Tax Property Tax Deductible Expenses Propertyallowance Reimbursedexpenses Rent a Room Relief Rental Residence Relief Residential property gains Selfemployed Small Business Stamp duty Tax free income TimetoPay Working from home 60 day capital gains limit Abolitionclass2 Accrualsbasis Acquisitions ADR Advisoryfuelrates AI AirBnB Alphabet shares Amap Annual Tax on Enveloped Dwellings Appeal APR Artificial intelligence Assessment Asset disposal Associated Company Associated Company Tax Rules ATED Autumnstatement Bad Debt Baddebts Badgesoftrade Beancounter Benefit Relief Benefits Breakeven Point Budget Business advice Business asset deferment Business coach Business Continuity Business Rates Business Rates Relief Businessgrowth Businesstypes Buy or Lease Equipment Buytolet Capital Allowances for Cars Capital Gain Capitalallowances Capitalexpenditure Car Capital Allowances Carry Back Losses Cash Change of Tax Basis ChatGPT CIS Scheme Class 2 NIC Class 3 NIC Common Tenant Companies Expenditure Companies House Company Account Deadlines Company Account Filing Company car Company Strike Off Company Tax Efficient Property Companyassociation Companyloanstaxfree Compulsory Strike Off Construction Industry Scheme Contacthmrc Contentmarketing Contributions Corporation Tax Losses Corporation Tax New Regime Corporation Tax Rates CorporationTax Costs Cryptocurrency Customerlistimplications Deductible Business Expenses Deductions Deferring NIC Demerger Depreciation Development Directors Directorsloans Disallowable Business Expenses Discovery Disposals Dispute Resolution Dividend allowance Dividend Allowance Reduction Dividend Planning Dividendallowance DLA Domestic Items Tax Relief Dormantcompany Dwellings EIS Employee Discount Employee management Employeecompensationpayments EmployeeOwnershipTrust Employers NIC Endoflifeplanning Enquiry EnterpriseResourcePlanning Entrepreneurmindset Equity Expenses Allowed For Tax Extrabenefit Eyetests Flipping Furnished Holiday Lets Tax Gift Aid Gift Allowance Growthhacks Help to pay tax bills HICBC HMO Licensing Fees Holdoverrelief Holiday Lettings Tax Home responsibilities protection How to apply for a Business Loan How to Extract Profit Humour Hybrid Illegaldividends Income Income and Gains Inflationary Gains Influencers Inheritance Tax Nil Rate Band Interestrelief Interestrestriction Investing Investment Investment in Woodlands Invoicing IR35 Joint Tenant Keypersoninsurance Landlords Self Assessment Late vat registration LBTT Leadgeneration Leadmagnet Leanbusinessmodel Lending Letting Agent Disbursements Letting Agent Recharres Lettings Relief Lifetime Limit Limitedcompany Liquidation Demerger Loan Loaninterest Long Lets Tax Longservice LTT Mainresidencerelief Managed Lets Management accounting Maritalhomedivorce Marriage allowance Marriageallowance Mileage payment Minimumwage Mixedusesdlt Mortgage costs Mortgage Interest Relief New property Newcompanycarfuelrates Newnicrules NIC 2023 to 2024 NIC savings Nicdisregard Nicreduction NMW Nmwerrors Non Allowable Business Expenses Non-taxable Nudgeletter Optiontotaxvat Overpayment Relief Overseas properties Paperform Partnership schemes Parttime Patternofoccupancy PAYE by Direct Debit Payroll Penaltypoints Pension Payments Tax Relief Pensions Performance-reviews Periodofgrace Periodsofabsence Personal Allowance Personal Expenses Personal finance Personalallowance Personalguarantees Postcessationrelief Pretradingexpenses Profit Profit-and-loss ProfitAndLoss Property Allowance Property Development Company Property Incorporation Property Investment Company Property investor accounts Property investor tax tips Property Rental Business Property Trading Propertycompany PRR R40 Receipts Recharges by Estate Agents Refund Regularpayments Relief for FHL Rent your drive Rentaroom Research & Devolopment Residentialsdlt Retail stock control Retainedprofits Revenue Room for rent tax Rti SA Salary Salary Sacrifice Savings SDLT changes Section 455 Tax Section455tax Selective Licences Landlords Self Assessment Self-employednic Selling Online Selling your Company Seperation Servicecharges Settlementslegislation Simplified Expenses Smallbiz Smallbusinessraterelief Software Spring Budget Staffparties Starting a business Student Loan Deductions SuccessJourney Surplus Cash Tax Allowance on Driveways Tax Allowances Tax bill Tax Break Tax Codes Tax Deadlines Tax Deductions Tax Filing Deadlines Tax Free Childcare Tax on Company Vans Tax on Enveloped Dwellings Tax position Tax Refund Tax tips for landlords Tax-free savings income Taxable Benefits Taxation Taxbillpayments Taxconsequences Taxincentives Taxposition Taxpositionassets Taxrelief Taxreliefs Taxses Terminationpayments Tips Trade professional Trading losses Training Transfer Assets Transfer Assets Between Spouses Travel Umbrellacompany Undisclosedincome Unpaid Rent VAT Bad Debt Relief VAT Deadlines VAT Disbursements VAT flat rate scheme VAT Penalties VAT registration VAT Reverse Charge Vatpenalties Vatregistered Vatregistrationthreshold Wellbeing Year End

TAGS

Beware of diverting dividends to minor children to fund education

October 3, 2023

Beware of diverting dividends to minor children to fund education

Owners of personal and family companies frequently pay themselves a small salary and extract further profits as dividends. To utilise the unused personal and dividend allowances of other family members, an alphabet share structure (whereby each shareholder has their own class of shares, e.g. A ordinary shares, B ordinary shares, etc.) provides the flexibility to tailor dividend payments to the circumstances of the shareholder.

Minor children also benefit from a personal allowance (set at £12,570 for 2023/24) and a dividend allowance (set at £1,000 for 2023/24). On the face of it, it can be beneficial to pay dividends to minor children to utilise their allowances. However, where shares are gifted by a parent to a child, the associated dividends are treated for tax purposes as dividend income of the parent rather than the child where they exceed £100 a year.

HMRC have recently become aware of a dividend diversion scheme which is marketed as a tax planning option to fund education fees. HMRC are of the view that the arrangements do not work.

The scheme

The scheme in question seeks to avoid tax by allowing the director shareholders to divert dividend income from themselves to their minor children. In a bid to avoid being caught by the settlements legislation, the arrangement works as follows.

1. A company issues a new class of shares which usually entitles the owner of the shares to certain dividends and voting rights.

2. A person other than the company owner, such as a grandparent of the minor child or a sibling of the company owner, purchases the new shares for an amount significantly below their market value.

3. That person gifts the shares to a trust or declares a trust over the shares for the benefit of the company owner’s children.

4. The purchaser of the new shares or the company owner votes for a substantial dividend payment in respect of the new class of shares.

5. The dividend is paid to the trustees of the trust.

6. As beneficiaries of the trust, the company owner’s children are entitled to the dividend.

HMRC are of the view that the arrangements are caught by the settlements legislation and do not work. The effect of the arrangements is to divert dividend income from the company owner to his/her minor children and as such the income will be taxed as that of the company owner rather than as that of the minor child.

Similar arrangements may also fall foul of the settlements legislation.

settlementslegislation

Landlords Tax

Landlords Accounts

Landlords Tax Returns

Property Tax

Property Accounts

Property Tax Return