Financial Focus On…Tax efficient family members

by Robin Beadle

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? You will need to

consider the effects of the National Minimum Wage (NMW) and the National Living

Wage (NLW) on family members.  These rates are currently (NMW) £6.95 per hour

for those aged 21-24, £5.55ph for 18-20 year olds and £4.00 for 16 & 17 year

olds) and NLW currently at £7.20 for those aged 25 and older. There is an

exemption from the NMW for family members living at home and who work in a

business (sole trader or partnership) but critically not if the business is a

company. Despite these regulatory hoops, however, by employing them you can

ensure that your family’s individual personal allowances are better utilised

(particularly if they have no other income), and 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.

For further information on any of the above points or to discuss your tax

affairs generally, please do not hesitate to contact Robin Beadle.

Author

Robin Beadle

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