Would your family like some extra cash?
If your family members have ever asked for some extra cash from your business, or you’ve thought about gifting shares, this episode is for you! Watch this to find out what you need to consider…
Hi, and welcome to another episode of BaranovTV, designed to demystify the world of accounts and tax and help your business grow.
This episode, I thought we’d talk about ways of extracting money from the business to pay family members or your spouse, so children or spouse. It’s something we’ve been discussing at quite some length with one of our clients this week who wanted to take some money out of the business to pay her children. She was talking about whether to give shares or give salary and a pension, how to do that, and how to structure it.
Extracting money from the business to pay family members is something you have to be really, really careful about.
So, to be allowable for tax, the salary package that you give to, whether it’s a child, and by child here, I’m talking minor through to adult, so just your child, or to a spouse.
To be allowable for tax, any salary that you give them, and any package that they receive, must be commensurate with the type of work they’re doing within the business. You can’t just say, oh, well, I’ve got a child, I’m going to give them this money.
They do actually need to be doing something within the business, and it needs to be recorded, what they’re doing, and you need to be able to prove and substantiate that to the Revenue.
So, for example, if you had a student child coming back at Christmas holidays, summer holidays, Easter holidays, etc and they were doing some admin work for you, you couldn’t suddenly decide to start paying them £40,000 a year; that would cause problems.
Equally, if you decided that you wanted to give somebody within your family a salary package that was £8,000 salary and £4,000 pension, that would be fine, BUT you need to make sure that £8,000 isn’t going to cause you problems with the national minimum wage.
You do need to check that you’re actually ticking all of those boxes, as well as the fact that the remuneration is commensurate with the job that they’re doing, so it does need to be market-rate, there or thereabouts. That, obviously, is going to differ depending on where you are in the country, but you do need to bear that all in mind.
If it’s a sole trade, that you’re trying to get money out of, for example, it’s known as ‘wife’s wage’. It’s a little bit old-fashioned, but if you’re a sole trader, it is accepted that you could be paying your wife, because technically, and traditionally, it’s often been the wife doing bookkeeping etc while a male sole trader is out working. You can pay up to the national insurance threshold without there being any problems, so you’ve got a lot more leeway as far as that’s concerned.
As soon as you go into a limited company, anything that goes through the payroll that needs to go through RTI, and those sorts of side of things, obviously, national minimum wage applies, and you do have to make sure that you’re very, very careful.
The other thing that we discussed with our client was shareholdings.
So, our client was asking about whether she could gift shares in her business to a minor, so a child who was under the age of 18.
To do so is going to cause problems for her. It’s not going to cause problems for the child. (Bearing in mind up to the age of 18, the Revenue does deem a child to be a child.)
So, if you gift shares up to the age of 18, you will have to pay, as the adult, the tax on any income that results from those shares, even if you have gifted them to a minor. The reason being is that the Revenue deemed that to be a Settlement, and there is specific Settlement Legislation which essentially says, ‘No, you’re trying to duck the tax; you’ve gifted them the shares in your business because you don’t want to pay the tax yourself. Therefore, you will need to pay it, and we will look to you to make sure that it’s on your tax return.’
That also applies incidentally even if it’s not shares in your own business.
So, for example, if you had shares in BT, for example, and you thought, I’ll pass those on to my 16-year-old son, YOU would be liable for any tax on any income that results from those shares.
So, Settlement Legislation is also something that you really need to bear in mind as well.
As ever, if you’re looking to find the most tax-efficient way of dealing with the passing on of shares, or extracting money from the business to pay family members, whether it be a sole trade or a limited company, please do get in touch because there are so many different aspects and so many different things to consider that you really need to look it on a case by case basis.
Please don’t do anything based on a conversation with Joe down the pub because that’s the worst thing you can do!
Come and speak to us, give us a ring, whatever works. We’d love to talk you through it and explain it so that it makes perfect sense to you.
That’s it from BaranovTV; I’ll see you all very soon.
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