Passing wealth to children and grandchildren

It depends on their ages, their circumstances and how much control you want to keep. Adult children can hold shares directly, and a gift to them is a potentially exempt transfer. A discretionary trust suits younger children, grandchildren yet to be born or a child you would rather not hand capital to outright. Trusts add entry and ten-yearly charges and registration, so many families use both: direct gifts to some, a trust for the rest.

Yes. Once a child is 18 or over, dividends on shares they own outright are their own income, using their personal allowance, £500 dividend allowance and basic rate band, and then 10.75%, 35.75% or 39.35%. HMRC still looks at the arrangement as a whole, so the shares should carry real rights rather than only a right to income. A child with little other income can receive a meaningful sum with little or no tax.

Where a parent gives shares, or the cash to subscribe for them, to a child under 18 who is unmarried and not in a civil partnership, the income is treated as the parent's. There is one exception. If the child's total income from the parent's gifts is £100 or less in the tax year, the rule does not apply. Above £100, all of the income is taxed on the parent, not just the excess.

Generally yes. The rule that taxes a child's income on the parent applies only to gifts by a parent. Dividends on shares given by grandparents to minor grandchildren are not caught, unless the arrangement is reciprocal (each set of parents funds the other's children) or the parents provide the money. Grandparents also do not need to be shareholders: they can fund a trust. We check the facts before any gift is made.

Seven years. A gift of shares to another individual is a potentially exempt transfer, so there is no inheritance tax if you live seven years. If you die within that period, the gift uses your nil-rate band first and may be taxed if it exceeds £325,000. Gifts made more than three years before death qualify for taper relief. The seven-year clock is the main reason families start early.

Taper relief reduces the tax, not the value, on a gift that becomes taxable because you die within seven years. Tax on gifts made three to four years before death is charged at 32% instead of 40%, then 24%, 16% and 8% in the following years. It only matters where the gift is larger than the nil-rate band. Gifts within the nil-rate band are not helped by it.

Yes. Separate share classes, often called alphabet shares, let the company declare different dividends on each class. One child might receive income now, another might be building up growth for later, and a child who is not interested in the company can be paid in other ways. This is far more flexible than dividend waivers, which HMRC can challenge as settlements. The structure is designed around your family, not a template.

Yes, and it is a common method. A cash gift from a parent to an adult child is a potentially exempt transfer, and the child then pays for new shares in the company. A gift made straight to the company is not a potentially exempt transfer, because it is not a gift to an individual, so it is treated as an immediately chargeable transfer instead. For minor children the settlements rules also apply.

Possibly. A gift of shares is a disposal at market value for capital gains tax, because a child is a connected person, even though you receive no money. Gifts between spouses are no gain, no loss. Business gift holdover relief does not apply to shares in an investment company. In practice the gain is kept small by giving shares when the company is first set up, before it has grown.

Yes, for gifts to individuals. The £3,000 annual exemption (with one year carried forward), small gifts up to £250 per person, wedding gifts of £5,000 to a child, £2,500 to a grandchild or £1,000 to others, and regular gifts out of surplus income are all exempt. They do not apply to gifts made to a company. The exemptions are modest beside the sums a family investment company holds, but they add up over the years.

Through a discretionary trust, yes. A trust can name its beneficiaries as a class, such as the settlor's children and grandchildren, including those born later. The trust holds growth shares in the family investment company, and the trustees decide who benefits and when. A company on its own cannot do this, because shares must be issued to people who exist. The trust is therefore a natural partner for a family planning across several generations.

Each person can settle up to the available nil-rate band, currently £325,000, with no entry charge, so a couple can put in £650,000 between them if neither has made other chargeable transfers in the previous seven years. Above that, the lifetime rate is 20%. Settling newly issued growth shares, which have a low value at the start, keeps the transfer small. Valuation matters, which is why our team prepares it in-house.

A family investment company is designed for that. The parents usually hold the voting shares and act as directors, so the children do not control anything. Shares for younger children can be held by a discretionary trust, and the articles can restrict transfers. Dividends can be paid or held back as the family decides. Nobody has to receive capital outright before they are ready, which is difficult to achieve with a simple gift.

As much or as little as you decide. In many families the parents hold the voting shares and the children's shares carry no vote, so they take part in the growth but not the decisions. In others, children are given a voice as they mature, through board seats, family meetings or voting shares. The right balance is set in the articles and shareholders' agreement, and can change as the family does.

It can raise extra points. Shares a family member receives because of the family relationship are normally outside the employment-related securities rules, but a child who is also a director or employee of the company should be reviewed. Any pay must reflect real work, and benefits linked to the gift can be a problem. We look at it with you when the structure is designed, not afterwards.

Shares in a private company are valued on a hypothetical open-market sale between a willing buyer and seller. There is no standard discount for minority holdings, and HMRC values each case on its facts. Growth shares issued with a hurdle at or above the company's current value usually have low value when issued. Our team prepares the valuation of freezer and growth shares in-house when shares are created or gifted.