Recent publicity has highlighted concerns about a form of tax planning designed to reduce the cost of funding school fees. Such schemes aim to reduce tax bills for owner-managers of companies by allowing them to make use of their children’s tax allowances.

Following this publicity, HMRC has published a Spotlight to confirm that they are aware of a specific avoidance scheme that they do not consider to work. HMRC is advising anyone using this, or similar schemes or arrangements, to withdraw from the scheme and contact them to settle their tax affairs.

What is a Spotlight?

Spotlights are a form of guidance which HMRC issues from time to time to make people aware of specific tax planning arrangements which HMRC consider are not effective and that are, in fact, tax avoidance. The aim is to highlight or ‘spotlight’ these schemes as something taxpayers should avoid.

Individuals who use avoidance schemes covered by a Spotlight are likely to be subject to HMRC enquiry, and will have to pay back any tax which HMRC considers is due, plus interest and potentially penalties.

A list of HMRC Spotlights is maintained on GOV.UK. This latest, Spotlight 62, concerns a dividend diversion scheme designed to help the owners of businesses fund the cost of school fees.

What is the scheme?

The scheme described in Spotlight 62 involves the creation of a new class (or classes) of shares in a company owned by the parents which are then transferred via a series of steps such that one or more minor children can benefit from them. The company owners then vote for substantial dividend payments on the new class of shares. Less tax is paid than if the dividends went direct to the parents as the shares are taxed on the children, using up their personal allowance (£12,570) and dividend allowance (£1,000).

Normally, when a parent transfers income-generating assets to their minor children (i.e. children under the age of 18), any income that arises in excess of £100 per year remains taxable on the parent. In an attempt to avoid this, the schemes described in the Spotlight introduce additional steps so that the new shares are first sold to a grandparent or a sibling of the company owner for less than market value. That person then either gifts the shares directly to the children of the company owner, or more likely places the shares in trust for them.

In HMRC’s view, this planning does not work and is caught by anti-avoidance legislation.

What should scheme users do?

Anyone within a scheme which is the same as or similar to the scheme outlined in Spotlight 62 should immediately seek advice on their position. They may need to withdraw from the scheme, disclose the position to HMRC and pay any additional tax due.

 

This article reflects the position at the date of publication (15 August 2023). If you are reading this at a later date you are advised to check that that position has not changed in the time since.   

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