As we approach the time of year for making resolutions, it seems appropriate to take a look at some of the ways that families can be more tax efficient.
If your family has a business, members of the family will often help out; from taking telephone calls to helping with bookkeeping, running errands or washing the company van at the weekend. So if they help out, why not formalise their duties and pay them for their assistance? Although family members are no longer exempt from the requirements of the National Minimum Wage (currently £6.50 per hour for those aged 21 or over, £5.13ph for 18-20 year olds and £3.79 for 16 & 17 year olds), you can not only ensure that your family’s individual personal allowances are better utilised (particularly if they have no other income), but also obtain a business deduction as well. On the down side, you would have to ensure that the payments are appropriate relative to the time spent and duties involved, as well as having to fulfil PAYE obligations.
Families are also useful in spreading overall family income. For example, if the family has a rental property, consider how it is owned. Is it owned by the person with the highest income and, if so, could better use be made of a spouse’s personal allowances or basic rate band by transferring the property into joint ownership, or perhaps fully into the other’s name? Provided that there are no mortgages connected with the let property, the transfer should be straightforward and HMRC will accept the transfer as routine tax planning provided the change in ownership is legally made and a genuine gift. You should, of course, consider your longer-term plans for the property before making any transfer from one spouse to another. For example, making a transfer to take advantage of a lower income tax rate but then moving it back again just before a sale in order to utilise Capital Gains Tax (CGT) exemptions or losses, may be challenged by HMRC.
Income from jointly held spousal assets is deemed by HMRC to be received on a 50:50 basis, no matter what the underlying capital ownership, unless you choose to have income split in accordance with actual capital proportions by making a special election. However, for other jointly held property (say between father and son), you can choose to split the income how you like, without special election – although having a written agreement is recommended. The share for tax purposes must then be the same as the share actually agreed.
Here a quick note about transfers. Transfers or gifts between spouses are generally free from both CGT and Inheritance Tax (IHT) (subject to limitations for those with overseas connections), although income tax implications would still need to be considered. Gifts between other family members, such as your children and grandchildren, are deemed to take place at open market value and are not exempt from CGT or IHT – but may be alleviated by various reliefs. The potential CGT and/or IHT costs of making an asset more income tax efficient must therefore also be considered.
If you wish to retain an element of control over property to protect the asset from immaturity or loss through debtors, etc., you could consider using Trusts, but specialist advice will be needed, and you won’t be able to continue to receive any benefit from the asset that you have gifted.
Particular care is needed if the intended gift recipient is a minor child. Minor children are not permitted to hold land in the UK until age 18 and, if the income from an asset that a parent has transferred to a child exceeds £100 pa, the income is assessed on the parent. This does not apply to grand-parental gifts though, enabling cash and other assets to leap-frog a generation relatively efficiently.
Families are great for saving tax – so be nice to them – but as with all things tax, it is very important to take professional advice in respect of your particular circumstances.