A client of ours is owned by father and son, both are active in the business and taking substantial dividends. The son has two children of school age (and therefore the father has two grandchildren), both of whom attend private school, which demands significant annual fees.
The drawings to pay for these fees are subject to higher rates of income tax. The father is approaching retirement age, and the drawings exceed his income requirements to meet his required standard of living
Solution
Rather than the father accrue substantial savings on his excess drawings, it was proposed that a number of his shares be placed into a trust for the benefit of his two grandchildren. The trust then receives income in the form of dividends.
The dividends are then taxable on the grandchildren, who have no other sources of income. The trust can then use the dividends income to pay for the school fees
Value impact
- Potential income tax saving of circa £100k when set against the expected level of drawings required to pay the school fees.
- Prevailing income tax rates remaining the same.
- The two grandchildren remaining in school for the next 10 years.