Family Tax Planning
In this article we're going to look at the main ways of tax planning with the use of family members…
Paying wages to your spouse/civil partner and children through your Business
Your spouse/civil partner may not have any income at all, and most certainly your children don't. This means their personal allowance is being wasted every year. Even children are entitled to a personal allowance.
If the amount up the level at which national insurance becomes payable of £5,715 in 2010/11 was paid to them as a wage, they would pay no tax on it and your business profits could be reduced.
Please note that children under the minimum school leaving age can only work a limited number of hours per week and local by-laws may restrict them further.
If you pay just 20% income tax and 8% Class 4 National Insurance on your business profits this would save you £1,600 for 2010/11 on each salary. And how many children do you have?
STOP! It's not quite that simple. To pay wages like this you need to follow the following rules…
Making your spouse/civil partner a partner or shareholder in your business to reduce your tax bill
This has been very topical with the so-called Arctic Systems case involving Mr & Mrs Jones. The case was originally won by the Revenue but on appeal to the High Court has been won by the taxpayer and finally on appeal at the House of Lords has been won by the taxpayer and that decision is now final.
The basic idea is that income that is created by your efforts in the business is paid to your spouse/civil partner who pays lower rates of tax than you do, thus saving tax and NI for the whole family.
For example, for 2010/11 if your self-employed business had profits of £70,000, then £43,875 is taxed at basic rates but the remaining £26,125 of this is taxed at 40%, plus 1% NI. So by introducing your spouse/civil partner into the business they can pay basic rate tax on profits that would otherwise be taxed at higher rates.
As with many things in the tax world, its not always that simple. The major obstacle the Revenue has been trying to put in the way is what is known as the ‘settlements legislation'.
In a nutshell this says if you give something to your spouse which is not wholly or substantially a right to income (meaning that the subject of the gift has a capital value as well as an income producing element), and income that does arise will be treated as the spouse's income for tax purposes.
However, after a long running battle in a well-known tax case known as Arctic Systems it is at present law that if you give your wife some ordinary shares in your company or perhaps a share in your partnership, this is not just a right to income but it also contains capital rights, as by owning the share they become entitled to a proportion of the assets when the business is closed down and have voting rights. Therefore the share is not just a right to income.
The actual facts of this case that was finally won by the taxpayer at the House of Lords cannot now be appealed are as follows…
Paying wages to your spouse/civil partner and children through your Business
Your spouse/civil partner may not have any income at all, and most certainly your children don't. This means their personal allowance is being wasted every year. Even children are entitled to a personal allowance.
If the amount up the level at which national insurance becomes payable of £5,715 in 2010/11 was paid to them as a wage, they would pay no tax on it and your business profits could be reduced.
Please note that children under the minimum school leaving age can only work a limited number of hours per week and local by-laws may restrict them further.
If you pay just 20% income tax and 8% Class 4 National Insurance on your business profits this would save you £1,600 for 2010/11 on each salary. And how many children do you have?
STOP! It's not quite that simple. To pay wages like this you need to follow the following rules…
- It must be for work actually done. Now it's going to be tough to argue your 2-year-old son is working for you but many spouses/civil partners do work and mature children may also help out. Maybe they do the books, answer the phone, stuff envelopes, etc. Keeping out of your way so you can get on doesn't count, as valuable as it may be. Draw up a list of their responsibilities to help your case. At present they do it for free because it's a family business but they can be paid for it. If you make your spouse a director, all the responsibilities imposed by Company Law on taking on this role must be worth something. You can also pay a family member a wage where you have a property that you rent out and the individual manages the properties. It's reasonable to pay them a salary commensurate with what they actually do. How much would it cost to get someone in to do that job? The national minimum wage level is at least a good place to start but a higher wage can be paid if you can justify it.
- The amount must actually be paid. It's no good the accountant just putting it through the accounts at the end of the year. Pay it, ideally through a bank account rather than cash so it's easy to prove it's been paid and record it in your accounting records.
- Comply with any PAYE procedures such as getting a P46 signed, completing an end of year PAYE forms as you would do for normal staff. It may also help keep up their National Insurance Contribution record even if they don't pay National Insurance on the salary.
Making your spouse/civil partner a partner or shareholder in your business to reduce your tax bill
This has been very topical with the so-called Arctic Systems case involving Mr & Mrs Jones. The case was originally won by the Revenue but on appeal to the High Court has been won by the taxpayer and finally on appeal at the House of Lords has been won by the taxpayer and that decision is now final.
The basic idea is that income that is created by your efforts in the business is paid to your spouse/civil partner who pays lower rates of tax than you do, thus saving tax and NI for the whole family.
For example, for 2010/11 if your self-employed business had profits of £70,000, then £43,875 is taxed at basic rates but the remaining £26,125 of this is taxed at 40%, plus 1% NI. So by introducing your spouse/civil partner into the business they can pay basic rate tax on profits that would otherwise be taxed at higher rates.
As with many things in the tax world, its not always that simple. The major obstacle the Revenue has been trying to put in the way is what is known as the ‘settlements legislation'.
In a nutshell this says if you give something to your spouse which is not wholly or substantially a right to income (meaning that the subject of the gift has a capital value as well as an income producing element), and income that does arise will be treated as the spouse's income for tax purposes.
However, after a long running battle in a well-known tax case known as Arctic Systems it is at present law that if you give your wife some ordinary shares in your company or perhaps a share in your partnership, this is not just a right to income but it also contains capital rights, as by owning the share they become entitled to a proportion of the assets when the business is closed down and have voting rights. Therefore the share is not just a right to income.
The actual facts of this case that was finally won by the taxpayer at the House of Lords cannot now be appealed are as follows…
Source...