A married couple, who were joint owners of a successful engineering business, decided to pass the reins to their son. He had worked in the business for nearly twenty years and proved himself capable of being in charge. The parents didn’t need or want a ‘golden handshake’ from the succession, so our customary ‘low tax cash-out’ arrangement wasn’t appropriate on this occasion.
Instead, we advised the couple to gift a few ordinary shares to their son and convert the rest of their holding to preference shares (to produce ongoing income for their retirement). Half of these new preferences shares were then put into trust for their grandchildren.
The dividend income flowing to the grandchildren’s trust will pay for their entire education and maintenance at nil Income Tax cost – giving a significant tax saving each year for up to twenty years. This will be a tremendous benefit to the couple’s son and his wife, who would otherwise have found themselves paying school fees and maintenance for their children out of taxed income for many, many years.