Using Family Members To Reduce Tax
A common form of tax planning if you are self employed is to employ family members effectively shifting some of the profits from you to them and potentially paying a lower rate of tax on this proportion.
HM Revenue and Customs has steadily become wise to this common form of simple tax planning and have published proposed new rules, widely known as 'Income Shifting' legislation, in order to attempt to prevent you from transferring some of their income across to your spouse and/or children. This legislation is still only proposed and with no mention of when it is likely to be implemented in the last budget, it is unknown if or when it may take force.
However, this proposed legislation does have its basis in historical tax legislation which has become difficult for HMRC to implement, which is the reason for the revised rules.
Given the current weakness of the economy and the slow recovery from the recession of the last two years, it is not widely expected that this legislation will be implemented in the next year or so which therefore leaves the gate open for an element of tax planning to be done for self employed individuals with lower earning family members, particularly spouses and children.
That said, we would suggest that caution should still be exercised when attempting this type of tax planning and any tax planning undertaken should be on a commercially justifiable basis. In short, this could mean that monies payable to a family member would be consistent with what would be paid to any unrelated person covering a similar role within your business.
It should be noted here that we are not suggesting you should pay your family members for a job which is not actually carried out by them. In the event of a successful enquiry by HMRC, such payments would likely to be treated as being your own income, which would put you back to where you started with interest and possible penalties to boot.
Shareholdings and Dividends
In many privately owned limited companies, it is possible to have a shareholding split between two spouses or even further split between children.
However, the reasons for the split should be commercially justifiable such as where initial start up capital was taken from joint savings or a mortgage on a jointly owned property, and thus the risk is shared.
It must also be seen that if a 'non-trading' spouse or child does receive shares in the business that they are able to hold those shares with full rights attaching to those shares and not restricted rights (i.e. they must have full rights as other shareholders to assets upon winding-up and voting rights as well as the rights to dividends).
Of course, one other consideration that one should make when looking at this particular piece of tax planning is whether of course you wish for them to have a stake in your business as should anything go wrong in your relationship you may end up needing to buy these shares back or trying to continue with the business with an aggrieved ex-partner as a shareholder!
Employment of Children
In the UK, it is perfectly acceptable to employ children over 13 years of age, although there are restrictions placed on how long children can work each day, over the weekends, and as a total throughout the year.
For children between 13 and 16 years old in England, they may not work:
- before 7am or after 7pm
- for more than 2 hours on a school day or Sunday
- before the close of school hours
- for more than 12 hours a week during term time
- for more than 5 hours (13-14 year olds) or 8 hours (15-16 year olds) on Saturdays and during school holidays on weekdays
- for more than 25 hours in total a week (35 hours if aged 15 or over) during school holidays
- for more than four hours without taking a break of at least one hour
For children between 16 and 17 years old, they may not work:
- more than 8 hours a day, or 40 hours a week
- more than four-and-a-half hours without at least a 30 minute break
- more than 5 days a week
From 1st October 2014, all 16 and 17 year olds also have a legal right to the National Minimum Wage of £3.79.
Should you decide to employ your children or indeed your spouse, you should be aware that in the event of an enquiry by HM Revenue and Customs, you could be required to provide evidence of the work which has been undertaken by your spouse or your children.
Therefore, you can see above that the opportunities to use your family members to reduce your overall tax bill are still available. However, as with any tax planning, care must be taken.
Should you wish to discuss the possibility of using family members in your business structure, please contact us.
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