Wifie working Tax question

[srebbe64]

With the pending Tax rises I'm thinking about a bit of Tax planning. Currently my missus doesn't earn much - she does voluntary work. As such, back in the summer I 'gifted' her some property which is generating about £30k of rental income, so our overall Tax went down a bit. I'm now thinking that if I can somehow transfer some of my salary to her then it would be further Tax advantageous. My Question: If my missus were to work for me for, say, £10k per year, how much work would she actually have to do and how do HMRC measure this?

[Eric Mc]

They don't - but they are entitled to ask.

Do you run a limited company?

If so,

is your wife a shareholder?

is youir wife a director?

if not, why not?

[srebbe64]

Eric Mc said:

They don't - but they are entitled to ask.

Do you run a limited company?

If so,

is your wife a shareholder?

is youir wife a director?

if not, why not?

Hi Eric.
Yes - it's a limited company.
No - I have a shareholders agreement with my colleagues.
No - she is not a Director.
Because a Director is meant to direct - she wouldn't.

[Eric Mc]

I was assuming you are a "one man band" typem operation. Obviously, with other "co-directors" and shareholders, it is not that easy to "install" your wife as a fellow director and/or shareholder.

Even if you want to pay her a salary as a mere employee, would you not have to agree that with the other directors?

[Wings]

You say you gifted your wife some property, why gift the property, why not sale the property to your wife, with your wife owing you the money for the sale. That is one very good way of reducing future Inheritance Tax.

The 30k rental (investment) income, I take that the net rental (investment) income is solely in your wife’s name, if not then that would be one way of reducing your tax liability.

Also remember that whilst your wife has no earned income, you can still obtain tax relief on Pensions contributions up to £2880, HMG making up the £2880 payment to £3600.00 in tax relief.

[srebbe64]

Eric Mc said:

I was assuming you are a "one man band" typem operation. Obviously, with other "co-directors" and shareholders, it is not that easy to "install" your wife as a fellow director and/or shareholder.

Even if you want to pay her a salary as a mere employee, would you not have to agree that with the other directors?

I am a 33% shareholder and Director - we employ about 200 staff. It's no problem for our wives to work if it's Tax efficient.

[Simpo Two]

Eric Mc said:

I was assuming you are a "one man band" typem operation.

If PH had a Dragon's Den I suspect 'srebbe64' would be one of them.

[jon-]

How does this relate to sole traders? As I'm PAYE, any profit from my sole trader business is taxed at a lovely 40% so I try and act as tax efficiently as possible.

On discussing matters with a trainee accountant he suggested putting a non working family member on the books as a low value employee (<5k pa) would be a good way forward, either as a cleaner or accountant depending on what they can actually help with.

This all seems a bit too simple to me... I'm sure HMRC would be wise to it.

[Eric Mc]

Purtting wages through the books for a family member is perfectly allowable. There are a number of factors you need to watch out for to ensure HMRC don't try to block the expense claim -

the family member genuinely performs SOME work in the operation

the wages are actually PAID to the family member

minimum wage provisions are adhered to - there are some "get outs" for family businesses so paying a family member will not necessarilly mean that they HAVE to be paid the full minimum wage.

Obviously, if the family member is paid above the tax and NI threshold, then the business (limited company, sole trader or partnership - it doesn't matter) would have to register for PAYE and deduct PAYE and NI on whatever salaries are paid to staff - family members or otherwise.

Edited by Eric Mc on Sunday 28th February 10:40

[jon-]

Thanks Eric, as always you're a fountain of knowledge

Does the activities have to be directly related to the business? For instance, if my mother, who doesn't work, came in and cleaned my house once a week because I was too busy to do so, would that be an allowable cost?

If the cleaning bill was just a few thousand a year I understand I wouldn't have to register for PAYE etc, would my mother just need to fill out an exemption form for taking home less than the threshold?

Thanks

[lozzom]

srebbe64 said:

Eric Mc said:

I was assuming you are a "one man band" typem operation. Obviously, with other "co-directors" and shareholders, it is not that easy to "install" your wife as a fellow director and/or shareholder.

Even if you want to pay her a salary as a mere employee, would you not have to agree that with the other directors?

I am a 33% shareholder and Director - we employ about 200 staff. It's no problem for our wives to work if it's Tax efficient.

Would you co-directors/shareholders mind if you transferred some of your shares into your wife's name? I presume you extract most of your remuneration via dividends rather than salary ....

[Eric Mc]

jon- said:

Thanks Eric, as always you're a fountain of knowledge

Does the activities have to be directly related to the business? For instance, if my mother, who doesn't work, came in and cleaned my house once a week because I was too busy to do so, would that be an allowable cost?

If the cleaning bill was just a few thousand a year I understand I wouldn't have to register for PAYE etc, would my mother just need to fill out an exemption form for taking home less than the threshold?

Thanks

The basic rule for the allowability of ANY expense being claimed by a business is that the expense must have been incurred "wholly and exclusively for the purpose of the trade". Cleaning business premises would be looked on as a legitimate "business expense".

If your mother is cleaning your "house", the amount you could claim out of what you pay her would need to be apportioned between cleaning the private part of your house and the part that is used for business purposes.
The best way of calculating the apportionment would normally be based on the "one business room out of X number of total habitable rooms" principle.

If the total you paid her was (say) £3,000, you would not be able to claim the full £3,000. I would say that the fraction would be somehwere between 1/4 and 1/7 of the total, depending on the number of rooms in the house.

Your mother doesn't need to do anything, apart from disclose the income on a Self Assessment tax return IF she is required to fill such a return in each year.

Edited by Eric Mc on Sunday 28th February 11:19

[lozzom]

Say you have 3 shareholders, all owning a third each, I would be tempted to think along the lines of set up a new class of shares, say A shares, issue some to all of you equally out of retained profits, then gift them to your wives so that the company can pay dividends on them.

You need to take advice from your accountant about it and you will find that different accountants have different views about 'income-shifting. However, although the Government said they were going to legislate against it, their last statement was:

"Income shifting
The Government firmly believes it is unfair to allow a minority of individuals to benefit financially from shifting part of their income to someone else who is subject to a lower rate of tax - known as income shifting. The Government has consulted on this issue, but given the current economic challenges is deferring action on income shifting and will not bring forward legislation at Finance Bill 2009. The Government will instead keep this issue under review".

You will need to take a view whether the consequent saving in income tax justifies whatever risk you and your accountant consider you are running, perhaps in terms of whether there will be legisation in the future and, if so, whether it will be retrospective etc etc

[Eric Mc]

Setting up different classes of shares is an invite to HMRC to ask questions,. At the very least, you will probably need to disclose payments made to "Special Class non-Voting Shareholders on a Form 42.

[srebbe64]

lozzom said:

srebbe64 said:

Eric Mc said:

I was assuming you are a "one man band" typem operation. Obviously, with other "co-directors" and shareholders, it is not that easy to "install" your wife as a fellow director and/or shareholder.

Even if you want to pay her a salary as a mere employee, would you not have to agree that with the other directors?

I am a 33% shareholder and Director - we employ about 200 staff. It's no problem for our wives to work if it's Tax efficient.

Would you co-directors/shareholders mind if you transferred some of your shares into your wife's name? I presume you extract most of your remuneration via dividends rather than salary ....

Historically it has been more Tax efficient to pay ourselves a bonus rather than a dividend. Only by a percent or so, according to my auditor. Also, we wanted the company's profits reduced for commercial reasons. This year it's more Tax efficient to pay a Dividend rather than a bonus - so I've been told.

Don't want to transfer shares to the wife, we have an insurance policy which relates to our shareholders agreement, in that if one of us pegs it then the respective shares are transferred to the other shareholders and an insurance policy pays our wives the value of the shares (calculated using an agreed formula).

Anyway, question answered, I will get my missus to do some admin work and pay her the amount to get her up to just below the (current) higher rate Tax band.

[Deva Link]

srebbe64 said:

Anyway, question answered, I will get my missus to do some admin work and pay her the amount to get her up to just below the (current) higher rate Tax band.

That's exactly what we do, with 3 directors. Our wives are all "working" for the company, but with different levels of involvement depending on how much free time that have.

We were advised to draw up proper employment contracts etc, but that's never been done. I do think it's particularly dodgy in the case of one of the wives as she has a full-time and pretty demanding job elsewhere.

We are looking at changing the way we get paid completely so we move from straight salary to a minimum salary and dividends, with the dividend split across our wives. Main snag is that our profitability is hard to predict (sales revenue is in a few big lumps) and, while it wouldn't bother me to have a minimal income while everything figured itself out, the 2 other guys need to be paid fairly normal amounts each month.

Edited by Deva Link on Sunday 28th February 13:07

[Engineer1]

Eric Mc said:

jon- said:

Thanks Eric, as always you're a fountain of knowledge

Does the activities have to be directly related to the business? For instance, if my mother, who doesn't work, came in and cleaned my house once a week because I was too busy to do so, would that be an allowable cost?

If the cleaning bill was just a few thousand a year I understand I wouldn't have to register for PAYE etc, would my mother just need to fill out an exemption form for taking home less than the threshold?

Thanks

The basic rule for the allowability of ANY expense being claimed by a business is that the expense must have been incurred "wholly and exclusively for the purpose of the trade". Cleaning business premises would be looked on as a legitimate "business expense".

If your mother is cleaning your "house", the amount you could claim out of what you pay her would need to be apportioned between cleaning the private part of your house and the part that is used for business purposes.
The best way of calculating the apportionment would normally be based on the "one business room out of X number of total habitable rooms" principle.

If the total you paid her was (say) £3,000, you would not be able to claim the full £3,000. I would say that the fraction would be somehwere between 1/4 and 1/7 of the total, depending on the number of rooms in the house.

Your mother doesn't need to do anything, apart from disclose the income on a Self Assessment tax return IF she is required to fill such a return in each year.

Edited by Eric Mc on Sunday 28th February 11:19

Surely though cleaning a house from which a business is run you could argue that if customers could visit that the office room, and any corridors / hallways on route would be "business premises" unless they come in through the window. Or is that too logical a concept to convince the tax man?

[lozzom]

Eric Mc said:

Setting up different classes of shares is an invite to HMRC to ask questions,. At the very least, you will probably need to disclose payments made to "Special Class non-Voting Shareholders on a Form 42.

Its actually very common

[Eric Mc]

Engineer1 said:

Eric Mc said:

jon- said:

Thanks Eric, as always you're a fountain of knowledge

Does the activities have to be directly related to the business? For instance, if my mother, who doesn't work, came in and cleaned my house once a week because I was too busy to do so, would that be an allowable cost?

If the cleaning bill was just a few thousand a year I understand I wouldn't have to register for PAYE etc, would my mother just need to fill out an exemption form for taking home less than the threshold?

Thanks

The basic rule for the allowability of ANY expense being claimed by a business is that the expense must have been incurred "wholly and exclusively for the purpose of the trade". Cleaning business premises would be looked on as a legitimate "business expense".

If your mother is cleaning your "house", the amount you could claim out of what you pay her would need to be apportioned between cleaning the private part of your house and the part that is used for business purposes.
The best way of calculating the apportionment would normally be based on the "one business room out of X number of total habitable rooms" principle.

If the total you paid her was (say) £3,000, you would not be able to claim the full £3,000. I would say that the fraction would be somehwere between 1/4 and 1/7 of the total, depending on the number of rooms in the house.

Your mother doesn't need to do anything, apart from disclose the income on a Self Assessment tax return IF she is required to fill such a return in each year.

Edited by Eric Mc on Sunday 28th February 11:19

Surely though cleaning a house from which a business is run you could argue that if customers could visit that the office room, and any corridors / hallways on route would be "business premises" unless they come in through the window. Or is that too logical a concept to convince the tax man?

Of course you could "argue" that point - if you feel inclined to.

In the curent tax monitoring system adopted by HMRC, you can sucessfully claim a particular expense for many years and get away with it, right up until the time they decide to investigate the figures in your accounts - and then they ask you for the underpaid taxes due because you overclaimed expenses.

So, the moral is, claim what YOU think is appropriate but be prepared to have to defend yourself if the claims are ever queried by HMRC.
I know from dealing with HMRC that DO NOT allow household expenses to be claimed 100% for business. They expect you to apply the "number of rooms" formula in working out the business element.

[lozzom]

Eric Mc said:

Setting up different classes of shares is an invite to HMRC to ask questions,. At the very least, you will probably need to disclose payments made to "Special Class non-Voting Shareholders on a Form 42.

You don't record such dividends on a Form 42 ....