Among numerous advantages to starting a family business the additional tax benefits available make a compelling case for sharing your business income with your children.
If you choose to do so, each child is entitled to the same £11,850 income tax personal allowance as their parents. They also qualify for capital gains tax allowances and reliefs.
So how does it work?
Provided that the parents earn over £8,333, they can enrich a son or daughter by a certain amount, provided that this amount (and any additional income) remains under £11,850. So for example, if you provide your child with £5000 – the maximum value at which your starting savings percentage rate is 0% – and they have no further income, this would indirectly save your business £3,333.
It can be difficult at first to make heads or tails of the figures, so it’s important that you discuss these benefits with your accountant and receive direct tax advice about what this could mean for you. At Moulds & Co Accountants, we would always recommend seeking effective tax advice and assistance from a qualified and experienced tax advisor where possible.
Can I go right ahead and give my child £5,000?
The key to bringing your children in to the business is to make sure that any involvement is commercially justifiable. For example, paying your ten-year-old £5000 a year for bookkeeping is clearly incorrect. HMRC can spot this misleading information and as such you should always aim to pay realistic rates for any role given.
What about a transfer of shares?
If you transfer shares in your company to children under 18 years of age, any dividend income more than £100 will be taxed as if received by the parent.
How about contributing to their school or university fees?
You might now be thinking whether children can be paid salaries or dividends as a contribution to school or university fees. You can make these payments, so long as you ensure that:
- Salary payments are commercially sound (as discussed above),
- The payments must be made from the business to your children
- Dividends are only paid to children aged 18 years or over.
Once received, they can use the cash however they, or you, see fit.
Finally, transferring shares or assets to your children is a chargeable event for capital gains tax purposes, however there are reliefs you can claim to defer any tax payable. Speaking to a knowledgeable tax advisor can ensure that you make the most out of this opportunity, become full aware of your available options and stay on the right side of HMRC in the process.