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.
