How can I pass on shares to my chil­dren?

We ex­plain the gift­ing rules and the tax im­pli­ca­tions

Shares - - CONTENTS - Laura Suter, per­sonal fi­nance an­a­lyst, AJ Bell

Pass­ing on in­vest­ments to chil­dren can be a great way of get­ting them in­ter­ested in in­vest­ing, and help­ing them to learn about how fi­nan­cial markets work.

How­ever, it’s worth not­ing that shares can be a high-risk in­vest­ment, as your money is based on one com­pany’s for­tunes, rather than spread across a num­ber of in­vest­ments. Be­cause of this, you may be bet­ter off sell­ing any shares you plan to gift and in­vest­ing the money into a more di­ver­si­fied fund for your chil­dren or grand­chil­dren.

Oc­ca­sion­ally some fam­i­lies may have emo­tional at­tach­ment to cer­tain com­pany shares and want to keep them in the fam­ily, while oth­ers may just think the shares rep­re­sent a good in­vest­ment for their off­spring.

It’s also the case that if you’re pass­ing on the shares to a child the money will re­main in­vested for a long pe­riod of time, mean­ing there is time to ride out the highs and lows of the mar­ket.

CAP­I­TAL GAINS TAX IM­PLI­CA­TIONS

If you are gift­ing the shares there are a num­ber of points to con­sider. Un­like trans­fers to spouses, which are free of cap­i­tal gains tax, any shares handed to chil­dren will be classed as a dis­posal for cap­i­tal gains tax pur­poses. This means that you could be handed a tax bill for pass­ing the shares on.

You would need to cal­cu­late any gain be­tween the value of the shares when you bought them and their mar­ket value when you trans­fer them to your chil­dren.

If this is above your an­nual cap­i­tal gains al­lowance of £11,700, or if you’ve al­ready used this tax-free limit this tax year, you’ll pay 10% or 20%, de­pend­ing on your in­come.

If you’re trans­fer­ring a large num­ber of shares, which have seen a hefty gain, and so are likely to face a large tax bill you could split the trans­fer of the shares up across a few tax years, to make use of mul­ti­ple years of your cap­i­tal gains tax al­lowance.

If you are gift­ing the shares there are a num­ber of points to con­sider. Un­like trans­fers to spouses, which are free of cap­i­tal gains tax, any shares handed to chil­dren will be classed as a dis­posal for cap­i­tal gains tax pur­poses

IN­HER­I­TANCE TAX IM­PLI­CA­TIONS

You also need to con­sider in­her­i­tance tax as the shares will be counted as a gift. If you die within seven years of pass­ing on the shares your es­tate may have to pay in­her­i­tance tax, at up to 40%, on the value of the shares – de­pend­ing on whether your es­tate is above the IHT nil rate band.

The rate at which IHT is paid de­pends on how long be­fore your death you gifted the shares.

How­ever, every in­di­vid­ual can gift up to £3,000 in a year free of in­her­i­tance tax (so £6,000 for a cou­ple). You can use this an­nual gift­ing ex­emp­tion to pass on the shares with­out the seven-year rule ap­ply­ing. If you haven’t used the pre­vi­ous year’s gift­ing al­lowance you can use dou­ble in one year, so £12,000 for a cou­ple.

DIV­I­DEND IM­PLI­CA­TIONS

If you are a par­ent gift­ing shares to your child and the shares gen­er­ate div­i­dends you also need to be mind­ful of how much in­come they are gen­er­at­ing.

Chil­dren can earn up to £100 a year free of in­come tax, but any­thing over this amount is taxed at the par­ent’s mar­ginal rate. This limit doesn’t ap­ply if the shares have been gifted by grand­par­ents, other rel­a­tives or friends.

To avoid this in­come tax and any fu­ture cap­i­tal gains tax, it would be best to trans­fer the shares into a Ju­nior ISA in the child’s name, where it can grow free of tax. How­ever, con­tri­bu­tions to Ju­nior ISAs must be made in cash, so you would need to sell the shares and then re-buy them within the ISA.

The an­nual limit on a Ju­nior ISA is £4,260, so if the value of shares is higher than this amount you will need to do this ef­fec­tive trans­fer over a num­ber of tax years.

With Ju­nior ISAs, one thing to con­sider is that when the child reaches the age of 18 they are in con­trol of the money and can de­cide what to do with it, so they could sell the shares at this point.

THE BEN­E­FITS OF TRUSTS

Trusts could be an al­ter­na­tive to us­ing a Ju­nior ISA. One op­tion is a bare trust, where the as­sets au­to­mat­i­cally be­come the trustee’s when they reach the age of 18 and over (or 16 and over in Scot­land).

A bare trust could be set up by the grand­par­ents and the shares trans­ferred into that wrap­per. If the bare trust is set up by a par­ent, they will still be sub­ject to the in­come limit, mean­ing the par­ent will pay in­come tax on any div­i­dends gen­er­ated above that £100 limit. How­ever, if it is set up by a grand­par­ent this rule is avoided.

Source: HMRC

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