Anecdotal evidence suggests that many parents have made Telecom share applications on behalf of their minor children. They may be in for some tax surprises if they hit the jackpot!
A minor child is one aged under 18 years of age. Such a child suffers from legal disabilities, including a lack of ability to enter into a contract which is enforceable against them. They are able to own property in their own name, but because of the restriction on their ability to contract, they may find third parties reluctant to deal with them. Where Telecom shares are registered solely in the name of a minor child, this may prove an unexpected obstacle to a fast sale!
Where a parent finances the acquisition of Telecom shares by a child, it may be either by way of an outright gift to the child, or by way of a loan. If it is by way of a gift, the child will have utilised part of his tax free threshold for gift tax purposes. That threshold is currently £192,900, which is calculated in terms of cumulative gifts and inheritances taken by the child since 2 December 1988. For the majority of children, no immediate tax liability is likely to arise since their allocation of Telecom shares will probably be well below the threshold amount, and only a minority of children will have received significant gifts and inheritances in the past. Alternatively, the acquisition may be financed by a loan from the parent. An interest free loan is a gift, in the amount of the interest foregone, on an annual basis. However, there is a £1,000 annual exemption in relation to a gift so that this is unlikely to be significant in tax terms.
If the shares are sold by the child (typically this will be shortly after acquisition) there may be a gain on the disposal. A minor child has the same capital gains tax annual exemption as has any other taxpayer. That is £1,000 in relation to the total of all gains on disposals in a tax year. If the child’s gain (including all other disposals of assets by the child in the tax year) is less than £1,000, no capital gains tax will arise. If it exceeds £1,000, the excess will be subject to capital gains tax at the rate of 20%.
The position becomes more complex if the shares are held, so that dividend income is received in future years. If the minor child is still aged under 18 when the dividends arise, this dividend income may be regarded as the income of the parent who bestowed the shares upon him, and not that of the child! This is due to anti-avoidance legislation designed to ensure that parents could not avail of their children’s personal allowances and standard tax rate band by diverting their income to their children. Telecom dividends, like all dividends from Irish resident companies, no longer carry a tax credit. The cash amount of the dividend is taxable at the marginal income tax rate of the taxpayer (which in this case could well be the 46% rate that may apply to the parent).
Where the dividend is paid after the child has reached his 18th birthday, it will then be treated as the income of the child and not that of the parent. A child just leaving secondary school is not likely to have other taxable income and may therefore find that, having regard to his personal allowances, he will have no tax liability on the likely level of dividend he will receive. However he will be a taxpayer in receipt of income and therefore will be obliged to make an income tax return. Likewise, if he disposes of the shares at a gain either before or after his 18th birthday, he will be obliged to make a tax return in that year Tax relief is unavailable for interest on borrowings used to acquire Telecom shares.
The peculiar treatment of income arising from a settlement on a minor child, as outlined above, is understandable against the background of the tax avoidance at which it was aimed. Within the context of a self assessment system where a taxpayer, who may have little or no knowledge of tax or accountancy or business matters, is expected to prepare a tax return annually, complexities thrown up by such relatively petty anti-avoidance legislation are probably inappropriate to a self assessment system. |
