Grandparent Trust – great opportunity for income tax savings

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If you run your own business through a limited company and have grandchildren, or children over 18 and you are currently paying towards their education or other costs out of your taxed income then you may be able to do this in a more tax efficient way. It is possible to save up to £9,800 a year in tax for each child if you are drawing dividends from your Company and paying the highest rate of tax of 38.1% on dividend income. This would be payable if your total income was over £150,000 a year.

The solution is to set up a trust for their benefit and gift some of your company shares into the trust and pay dividends into the trust instead of receiving them yourself. The dividend income in the trust can then be used for their benefit by paying towards their education or other costs.

The terms of the trust and the rights of the shares gifted need to be structured in a sufficiently flexible way to enable the income stream to be sufficient for your needs, especially whilst any of your children are aged over 18 and in further education.

The maximum amount of dividend income that can be paid to an individual tax free is £16,000 per annum and if you wished to pay this to your grandchildren out of your own taxed income this would mean drawing divided income of £25,800 a year to give you net income of £16,000 after tax. Once the above planning is in place you would only need to pay a dividend of £16,000. The potential tax savings will be smaller if you are only liable to pay tax at the lower dividend tax rates of 7.5% or 32.5% but it would still be worthwhile to consider this planning. Alternative trust structures giving a lower level of saving may be more appropriate but it all depends on the anticipated level of education costs.

The recommended minimum shareholding to be gifted would be 5% and savings can only be achieved if the business is making sufficient profits to enable dividends to be paid.

There are no immediate tax costs of setting this up as any capital gain on the transfer of the shares into trust can be deferred and providing the business is a trading company then no inheritance tax will arise as 100% Business Property Relief will be due providing you have held the shares for a minimum of 2 years.

When the Trust is no longer required because the child has left full time education and is using their own personal allowances the trust can either be wound up in their favour so that they have a small stake in the family business or the dividends can be reduced. There may however still be ongoing tax benefits to continue paying dividends in that even though they may be using their own personal allowances it may still be possible to carry on providing them with a tax benefit by using their £5,000 a year dividend allowance.

If you would like to arrange a no-obligation meeting to discuss this opportunity in more detail please contact Robert Peel at hello@garbutt-elliott.co.uk or fill in our contact form below: