Paying dividends to parents. Is this legal?
Discussion
In the pub a few nights ago, a friend (yes really – definitely not me as I’m PAYE) explained that he has given his ex wife and his parents shares in his business. He pays his ex wife dividends from the business in lieu of maintenance and he notionally pays his parents dividends – i.e. they get a tax slip in respect of the dividends as if it is their income but the money is paid direct into his bank account.
Doing this uses up his personal allowance and 20% tax band plus uses up any slack in his ex and his parents’ 20% tax bands. They all have income but none of them are 40% tax payers. So, based on a low six-figures income each year (I don’t know the exact amount) this would save him about £20,000 of income tax each year. I guess the exact figure might be a bit less than this because of the way dividends are taxed for 40% tax payers.
He said he had run it by his accountant who was perfectly happy with it. I’m curious if it really is as simple as that. I couldn’t see anything actually illegal about it but it does seem a bit of a fiddle.
I guess there is at least a theoretical inheritance tax issue – i.e. his parents are effectively giving him money each year which could be caught as part of their estate if they died within the next 7 years. Anything else?
Cheers.
Doing this uses up his personal allowance and 20% tax band plus uses up any slack in his ex and his parents’ 20% tax bands. They all have income but none of them are 40% tax payers. So, based on a low six-figures income each year (I don’t know the exact amount) this would save him about £20,000 of income tax each year. I guess the exact figure might be a bit less than this because of the way dividends are taxed for 40% tax payers.
He said he had run it by his accountant who was perfectly happy with it. I’m curious if it really is as simple as that. I couldn’t see anything actually illegal about it but it does seem a bit of a fiddle.
I guess there is at least a theoretical inheritance tax issue – i.e. his parents are effectively giving him money each year which could be caught as part of their estate if they died within the next 7 years. Anything else?
Cheers.
Thanks.
I confess it seems a fiddle to me but I can't see the actual problem, other than the payment of the dividends to his bank account rather than his parents. How is that so different from them receiving the dividends and then paying it straight to him? Would it make it legal for them to do that, which would seem like a small technical difference?
His parents do know about it. The father had a business himself before he retired and did the usual thing of having his wife as a shareholder and receiving dividends to use up her tax allowances. So they see it as perfectly normal thing to do (notwithstanding that transfers between spouses are treated differently than between children and parents). Plus, my friend claims that his accountant says it is fine.
I confess it seems a fiddle to me but I can't see the actual problem, other than the payment of the dividends to his bank account rather than his parents. How is that so different from them receiving the dividends and then paying it straight to him? Would it make it legal for them to do that, which would seem like a small technical difference?
His parents do know about it. The father had a business himself before he retired and did the usual thing of having his wife as a shareholder and receiving dividends to use up her tax allowances. So they see it as perfectly normal thing to do (notwithstanding that transfers between spouses are treated differently than between children and parents). Plus, my friend claims that his accountant says it is fine.
I know there is the £3,000 limit beyond which anything falls within inheritance tax, taking into account the potentially exempt transfer 7-year thing.
I thought there was also some rule around unlimited amounts as long as they were made from income and didn't materially affect lifestyle of the giver (or something like that)?
Basically, I want to push my friend on this. I don't think what he is doing is right (I mean from a legal perspective as much as a moral one) and I don't think he realises just how serious it could be if HMRC picked up on it. And I certainly don't want his parents (who are a nice old couple) to have to deal with the grief they might well get too.
I thought there was also some rule around unlimited amounts as long as they were made from income and didn't materially affect lifestyle of the giver (or something like that)?
Basically, I want to push my friend on this. I don't think what he is doing is right (I mean from a legal perspective as much as a moral one) and I don't think he realises just how serious it could be if HMRC picked up on it. And I certainly don't want his parents (who are a nice old couple) to have to deal with the grief they might well get too.
I wouldn't be surprised to find out that my friend had heard what he wanted to hear from his accountant. For example, perhaps his accountant said that he could pay dividends to his parents first and his parents could then pay it to him out of surplus income, and my friend then took it a step further and missed the step of paying it to his parents first without understanding the implications.
The firm of accountants is a decent small firm - I can imagine they would be happy providing quite aggressive advice to small businesses but I can't see them advising on something outright illegal.
I'll follow up with him to find out the details of this and see if I can persuade him to review what he is doing to make it legal.
The firm of accountants is a decent small firm - I can imagine they would be happy providing quite aggressive advice to small businesses but I can't see them advising on something outright illegal.
I'll follow up with him to find out the details of this and see if I can persuade him to review what he is doing to make it legal.
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