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Transferring Shares to Children or Family Members: Tax Risks, Dividends & HMRC Spotlight 62 (Guide for Owner-Managed Businesses)

A very common question we see from directors is:

“Can I transfer shares to my children?”
“Can I pay dividends to my family to reduce tax?”
“Should I use a family investment company or family shareholders?”

While these strategies are often discussed in tax planning circles, HMRC has issued a formal warning under Spotlight 62 about income diversion arrangements used by owner-managed businesses (OMBs) and family companies.

This means directors should proceed carefully before transferring shares or allocating income within a family structure.

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What HMRC Spotlight 62 Is About (In Simple Terms)

HMRC Spotlight 62 targets arrangements where company profits are diverted to family members who pay lower tax, while the main director or shareholder still controls the business and income decisions.

HMRC’s position is clear:
If income is being redirected mainly to reduce tax — rather than for genuine commercial ownership — the arrangement may be challenged under anti-avoidance rules.

This applies even where:

• Shares are legally transferred
• Dividends are correctly declared
• Family members are adult shareholders

Legal form alone does not guarantee the tax outcome.

Why HMRC Issued Spotlight 62

HMRC issued Spotlight 62 after noticing a significant increase in income diversion planning within family and owner-managed companies.

In particular, HMRC identified growing use of:

• Alphabet share structures
• Dividend waivers
• Dividend-only share classes
• Family income planning using adult children or spouses

These arrangements were especially common in:

• Owner-managed businesses
• Family companies
• Professional firms (very common in practice)

From HMRC’s perspective, many of these structures allowed directors to retain full control of profits while redirecting income to lower-tax family members, without any genuine commercial change in ownership.

This is why HMRC now actively reviews these arrangements during enquiries.

Can I Transfer Shares to My Children to Save Tax?

This is one of the most misunderstood areas of UK tax.

Transferring shares to children or family members is not automatically tax avoidance. However, the tax outcome depends on the commercial substance of the arrangement.

HMRC will ask key questions such as:

• Who really controls the company?
• Who decides dividends?
• Is there genuine ownership or just income redirection?
• Would the arrangement exist without the tax advantage?

If the structure exists mainly to divert income, HMRC may still tax the income on the original shareholder under the settlements legislation (ITTOIA 2005).

The Settlements Rules – The Key Law Directors Should Know

Even if shares are transferred legally, the settlements legislation (ITTOIA 2005, s619 onwards) can apply.

These rules are designed to prevent:

• Income diversion
• Artificial arrangements
• Tax reduction through family income splitting

Crucially:

• The rules do NOT only apply to minors
• They can apply to adult children and family members
• They focus on “who provided the bounty” and who controls the income source

So simply transferring shares does not automatically shift the tax liability.

What About Paying Dividends to Family Members?

Many directors assume that once a family member is a shareholder, dividends paid to them are always taxed on them.

This is not always the case.

HMRC may challenge dividend arrangements where:

• The director still controls the company
• Dividends are structured or streamed
• The main purpose is tax saving
• The family member has little commercial involvement

Spotlight 62 specifically warns against dividend diversion structures within closely controlled companies.

Family Investment Companies (FICs) – Are They Safe?

Family Investment Companies (FICs) are widely used for long-term wealth planning and succession. However, they must be structured properly.

Lower risk (from an HMRC perspective) usually involves:

• Genuine shareholdings with real economic rights
• Long-term investment purpose
• Commercial rationale (not just tax saving)
• Proper governance and documentation

Higher risk arises where a structure is used mainly to redirect income while control remains unchanged.

HMRC is more likely to challenge artificial income allocation than genuine succession planning.

Relevant Case Law HMRC Relies On

Jones v Garnett (Arctic Systems) [2007]

This well-known case allowed dividend splitting between spouses, but only because there was genuine share ownership with full rights and commercial reality.

HMRC still distinguishes cases where share rights are restricted or income is engineered.

Young v Pearce [1996]

This case confirmed that arrangements involving engineered income flows and non-commercial structures can fall within settlements legislation, even where legal ownership exists.

The key takeaway:
Substance matters more than structure.

High-Risk Red Flags for HMRC Enquiries

Based on Spotlight 62 and enquiry trends, risk increases where:

• The director retains full control of the business
• Shares are transferred mainly for tax planning
• Dividend patterns are disproportionate
• There is no commercial rationale
• Income is redirected but economic control stays the same

Owner-managed businesses are a key focus area because directors control dividend decisions.

When Transferring Shares to Family Members Is More Defensible

Arrangements are generally more robust where there is:

• Genuine ownership and shareholder rights
• Long-term succession planning
• Real exposure to business risk and growth
• Commercial documentation and rationale
• Consistent governance

HMRC is less concerned where there is a genuine transfer of value and ownership, rather than short-term income planning.

Practical Advice for Directors and Business Owners

Before transferring shares to children or using family income planning, you should consider:

• The commercial purpose of the structure
• Control vs ownership reality
• HMRC Spotlight 62 risks
• Long-term tax implications
• Potential enquiry exposure

Online templates and generic advice can be risky in this area.

Final Thoughts

Transferring shares to children, family members or using family investment structures is not automatically inappropriate. However, HMRC Spotlight 62 makes it clear that income diversion arrangements within owner-managed and family companies are under active scrutiny.

For directors, the key issue is not simply whether the paperwork is correct, but whether the arrangement reflects genuine commercial ownership rather than a mechanism to reduce personal tax.

Professional advice should always be obtained before implementing any family share restructuring to ensure the structure is compliant, commercially robust and defensible in the event of an HMRC enquiry.

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