Let’s look at the key considerations of giving shares to minors.
The short answer to this is yes, it is possible. In England and Wales there are no statutory provisions prohibiting a child (under the age of 18) from owning shares. However, some companies do not accept minor shareholders by provision in their articles or terms of issue. Even though children can own shares at any age, they have to be over the age of 16 to become a director of the company.
Benefits of allotting shares to children
Some family-owned companies allot shares to children as a means of providing them with:
- capital assets which may be likely to increase in value as part of longer term inheritance and capital gains tax planning
- dividend income on such shares to utilise children’s personal allowance and lower tax rates applicable to dividends.
Settlement provisions
Even though a child can own shares, nevertheless one must not forget the settlement legislation under ITTOIA S629. These provisions apply to arrangements where the settlor, or their spouse or civil partner, retains an interest in the settlement.
Where ITTOIA/S629 applies, the income (over £100 per annum) paid or made available to a minor child or step child will be taxable in the hands of parents and not treated as the child’s income for tax purposes. A step child includes the child of a civil partner. This means that any income to a child on the allotted shares in a family owned company, directly or indirectly, is deemed to be that of the parents for tax purposes.
It is a similar position if they try to create a trust where the child is a beneficiary. For any income in a bare, discretionary or interest in possession trust, ITTOIA/S629 applies to treat the income belonging to the child as that of the parent for tax purposes whether or not it is paid to the child.
Example: A parent creates a bare trust (see TSEM1563) for a child on 1 January 2008. No payments are made out, and the trustees retain all the income which exceeds £100. Although no income is paid to or for the benefit of the child, ITTOIA/S629 applies to treat the income as that of the parent because the income belongs to the child.
Disadvantages of allocating shares to children
At common law a child will not be bound by a contract to buy shares as they are not ‘necessaries’, so theoretically, a child could relinquish obligations placed upon them by owning shares, particularly where there are unpaid shares. Thus, normally public companies exclude minors from holding their shares.
Sometimes it is hard for the company to attract new investors due to the restricted obligations of minor shareholders.
The dividend income (more than £100 per annum) on shares given in family owned company is taxed in the hands of the parents under settlement rules as mentioned above.
It may create fragmentation of control of the company. Children owning shares control part of the business. Sometimes it becomes very difficult if you want to resurrect the full control of the company, especially when they disagree with any of your proposals or resolutions.
Key considerations when giving shares to a minor
If you are issuing new shares to a minor child, consider taking professional advice on whether you should issue the existing share class or if you should create a new share class.
Before issuing any shares to the children, consider what impact it makes on your employees. It may demotivate your hard working key employees who are looking forward to owning a share and gaining larger influence over the company. They may believe their efforts are in vain, hence it can be hard to maintain their support in ‘family companies’.
Article from ACCA In Practice