This is the final tax of our Tax & Accounting at Christmas Special, as we analyse the tax and accounting treatments of all things Festive and open a door in our Christmas Advent calendar to count down each working day until Christmas day in the UK. 

The Family

The Festive Season is a time for catching up with friends and family. This time we have a look at tax issue for the family.

Employing family members

  • You can employ your spouse or other family members whether you operate as a sole trader or partnership business or via your company.
  • Wages must equal to or be above the current National Minimum Wage (NMW), or National Living Wage (NLW).
  • Children are restricted in terms of the type of work that they can do whilst at school age.
  • HMRC can apply the settlements legislation to a wage paid to a child if they are a minor and not actually working in return for a wage.
    • Under the settlement provisions any income over £100 is taxed as if it is the income of the parent, see Settlement anti-avoidance rules. This gives the same result of disallowing the payment (the parent is then taxed on the total profits).

HMRC may challenge the rate of remuneration paid to family members if it considers that the expense is not "wholly and exclusively incurred" for the purposes of the business. 

  • There are several tax cases where wages paid to family members were disallowed, see our guide to Wages: spouse or family

Family companies

  • Gifts of shares between family members are normally exempted from the income tax Employment-Related Securities (ERS) rules; this means that it is relatively easy to create a family trading or investment company.
  • Shareholders can receive a tax free Dividend Allowance of £2,000 per year.
  • For those with family trading companies, recent changes to CGT Entrepreneurs' Relief may make the idea of giving the family shares with restricted rights a less attractive.
  • Family Investment Companies (FICs) are a popular alternative to trusts as a way of managing assets, alternatively, family partnerships can provide privacy with simpler rules.

Passing on Family investment companies and partnerships

  • Family investment companies are often used because of their flexibility; it is easier to transfer shares gradually to future generations than to transfer property whilst retaining over control of the company.
  • FICs often do not qualify for Business Property Relief  (BPR) as they do not meet the "wholly or mainly" (more than 50%) trading test.
  • They also are unlikely to qualify for Entrepreneurs Relief (where the trading test is much stricter) meaning that gifts of shares in an established FIC or family investment partnership will be subject to capital gains tax at full CGT rates.
  • Careful structuring of the initial shareholdings can help in mitigating inheritance tax (IHT) as minority shareholdings are discounted in value for IHT and avoid triggering CGT charges on gifts.

Passing on assets within the family and trusts

  • A transfer into a UK trust allows assets to be retained within the family for future generations, without the donor having to give up control (by being a trustee) but whilst moving value out of their estate for IHT purposes.
  • A transfer into trust is a transfer of value and a chargeable lifetime transfer subject to lifetime IHT at 20%, unless within the nil rate band. The value stays within the donor's estate for seven years.
  • It is also a market value disposal for capital gains tax purposes but is eligible for holdover relief.
  • Trusts are subject to Ten year anniversary and exit charges.
  • If the assets qualify for relief such as BPR or Agricultural Property Relief (APR) these can continue to apply during the lifetime of the trust but care is needed to ensure assets continue to be eligible for relief.
  • Other reliefs can apply in passing assets onto the family such as Normal expenditure out of income and the small gifts exemption which covers Christmas gifts.

Useful guides:

ABC or alphabet shares: family companies

 Wages: spouse or family

Family Investment Companies

Settlement anti-avoidance rules

IHT: Estate planning checklist 

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