How can I help my son finance his company

AS writes: I want to help my son start up a manufacturing business but I do not want to treat him more favourably than my other three children. I plan to use £80,000 to subscribe to £1 ordinary shares in his company. If it goes bust I have adequate capital gains to set against the loss. I believe I cannot set the loss against my own income because I am too closely related. If the business flourishes, I would give 20,000 shares to each child. Can you advise?

Answer

The business is being run by your son so you will not qualify for relief under the Enterprise Investment Scheme (EIS). This is because you are treated as being an "associate" of your son. Yet brothers and sisters are not seen as associates under the EIS relief rules. So they would qualify for the 20% income-tax relief available under the EIS if they could invest themselves. You say you have sufficient capital gains to offset the loss if your son´s business fails. To use the losses you will need to make a negligible value claim, where the company is worthless, or the company will have to be in liquidation. Once the loss has been agreed by the Inland Revenue it will be used against realised gains in the same tax year or future years. If your gains are realised in the current tax year, the losses, if they arise, will probably be in the next tax year and therefore cannot be offest against the gains. An alternative to using the losses against capital gains is to make a claim under section 574 of the Income and Corporation Taxes Act 1988 for the losses to be set against your income for the relevant year. If the company is successful, you plan to divide the shares equally among your children. This will be a potentially exempt transfer for inheritance-tax purposes and as long as you survive another seven years will not form part of your estate on your death. The gift will also rank as a disposal for capital-gains-tax purposes and will require a holdover election to ensure that no CGT liabilities are crystallised on the transfer. An alternative to transferring the shares would be to leave them to your children in your will. This way the value of your shares on your death would be minimised by business property relief and your children would inherit the shares with the value at your death rather than the original cost under a holdover election. You should seek professional advice to review the options available