Tax tips for Family Businesses

****UPDATE 18 MARCH 20****: New Off-payroll working rules announced see – https://www.shipleystax.com/coronavirus-off-payroll-ir35-reforms-to-be-postponed-until-april-2021/

Do the off-payroll working rules apply to you? Are you considering winding up your personal service company in April? We explain generally the best way to wind up your company from a tax perspective.

Come April 2020, the much maligned off-payroll working rules come in effect and many workers who have been providing their services through an intermediary, such as a personal service company, may find that their company is no longer needed. This may be because that tax and National Insurance is deducted from payments made to the intermediary, the tax advantages associated with operating through a personal service company are lost. Alternatively, it may be because their end client does not want the hassle of operating the off-payroll working rules and has decided only to use ‘on-payroll’ workers, putting workers previously using personal service companies with no choice but to go on the payroll or an umbrella company.

Where the personal service company is not needed, what is the best way to wind it up and extract any remaining cash?

Striking off

Striking off can be an attractive option where the personal service company can pay its debts and has less than £25,000 left in the company to extract.

The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend, with the result that the capital gains tax annual exempt amount, if available, can be used to reduce the taxable amount. Where entrepreneurs’ relief is available, any taxable gain is taxed at only 10%. To qualify for this treatment, the company must be struck off within two years of making the last distribution.

If the amount left to extract is less than £25,000, but it would be preferable for it to be taxed as a dividend, for example, because the dividend allowance and/or the personal allowance are available or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. However, to prevent the capital treatment applying, it would be necessary to breach one of the conditions so that the dividend treatment applies instead. This can be achieved by waiting more than two years from the date of the last distribution before striking off.

Members’ voluntary liquidation (MVL)

Where the funds left to extract are more than £25,000 and it would be beneficial for them to be taxed as capital – for example, to benefit from entrepreneurs’ relief or to utilise an unused annual exempt amount, the members’ voluntary liquidation (MVL) procedure can be used.

An MVL is a formal procedure; the director(s) must provide a sworn affidavit that creditors will be paid in full and a liquidator must be appointed.

Entrepreneurs’ relief

One important pitfall which many fail to appreciate is that the availability of entrepreneurs’ relief is not automatic and must be claimed based on facts. Using a liquidator to wind up a company does not automatically mean the company shares will qualify for entrepreneurs’ relief, the shareholder needs to ensure that the shares will qualify for the relief as the company may fail one or more the tests.

If you are thinking of liquidation and would like to check whether you qualify for entrepreneurs’ relief, please call us on 0114 275 62 92 or email us at info@shipleystax.com.

Do employers have to pay tax on gifts provided to employees? And if it is provided each year, or is provided to all staff members, does it mean that employees have a contractual entitlement to it? We look at some general principles.

Certain tax exemptions allow employers to provide employees with low cost benefits free of tax and National Insurance and without any reporting obligations. These are known as “trivial benefits” and, for the purposes of the exemption, a benefit is trivial if the cost per head is not more than £50. Where trivial benefits are provided to an officer of smaller companies or a member of their family or household, an annual cap of £300 per tax year also applies.

For the tax exemption to be available, the benefit must not be provided in return for services provided and the employee must not be contractually entitled to receive the benefit.

Contractual entitlement

Contractual entitlement is wider than simple inclusion in the contract of employment. Consequently, the fact that the contract makes no reference to the provision of trivial benefits is not enough to satisfy the conditions for the exemption.

Recently, HMRC highlighted a number of ways in which a contractual obligation may arise, including:

• a letter to the main contract document
• a staff handbook
• a redundancy agreement
• an employer union agreement

If any of these provide for the employee to receive the trivial benefit, the exemption will not apply.

Beware of creating a ‘legitimate obligation’

Employers seeking to make use of the trivial benefits exemption should also be wary of falling into the ‘legitimate expectation’ trap; this implies a contractual obligation may also arise if the employee has a legitimate expectation to receive the benefit.

Suppose an employer provides employees with a cream cake each Friday. While there is no contractual obligation for the employer to provide the employees with a cream cake on a Friday, the fact that the employer does so every Friday can create a legitimate expectation, potentially taking the provision of the cakes outside the trivial benefits exemption.

Frequency is one element which seems to be an issue here – HMRC seemingly do not apply the legitimate expectation argument where a benefit is provided annually, even if it is provided each year. HMRC’s own guidance states:

“Just because a gift is provided each year, or is provided to all staff members, does not mean that the employee has a contractual entitlement to it.”

The guidance also instructs HMRC officers that they “should not normally challenge modest gifts that are provided infrequently to employees, just because they are given to employees each year – for example, a Christmas or birthday gift”.

So what’s best practice?

Generally, to avoid falling into the legitimate expectation trap, vary both the nature and timing of trivial benefits provided to employees. Better still, seek advice from our tax experts on info@shipleystax.com or email us on 0114 275 6292.

By transferring a property into joint names prior to selling is an easily avoided mistake – read our blog to see if this could potentially save you tax.

Disclaimer Alert: This blog is intended as general guidance only. We strongly recommend you seek professional advice before taking any action.

Where a property is wholly treated as your only home and qualifies for Private Residence Relief, whether owned jointly or in one name, the relief shelters any gain that arises on sale and there is generally is no tax to pay.

However, where a gain is not fully sheltered by private residence relief, as may be the case for an investment property or a second home, there can be very different tax consequences depending on how it is owned.

Take advantage of certain rules for spouses and civil partners

There are some breaks in the tax system for married couples and civil partners in certain situation which gives them the ability to transfer assets between each other at a value that gives rise to no tax. This can be very useful from a tax planning perspective to secure the optimal capital gains tax position on the sale of property where full private residence relief is not available. In the right circumstances this could enable a couple to utilise available annual exempt amounts and lower tax bands.

Capital gains tax on residential property gains is charged at 18% where total income for basic rate taxpayers (set at £37,500 for 2019/20) and 28% thereafter.

Case study

Suppose Ron and Rita have been married a number of years. In addition to their main residence, they have a holiday cottage, which is owned solely by Ron. As their lives are busy, they no longer use the cottage much and decide to sell it. They expect to realise a gain of £100,000.

Rita does not work and has no income of her own. Ron is a higher rate taxpayer. Neither has used their annual exempt amount for 2019/20 (set at £12,000).

If they leave the property in Ron’s sole name, they will realise a chargeable gain of £88,000. As a higher rate taxpayer, this will give rise to a capital gains tax bill of around £24,640.

However, as Rita has her basic rate band and annual exempt amount available, making use of the spousal rule to transfer the property in jointly held names prior to sale can potentially save the couple a lot of tax. If the circumstances qualify, each will realise a gain of £50,000.

As far as Ron is concerned, he will have a chargeable gain of £38,000 on which tax of £10,640 will be payable.

Rita will also have a chargeable gain of £38,000. As her basic rate band is available in full, the first £37,500 is taxed at 18% (£6,750), with the remaining £500 being taxed at 28% (£140). Thus, Rita’s tax liability is £6,890, and the couple’s total tax bill is £17,530.

By taking advantage of tax exemptions, the couple could be able to make use of Rita’s annual exempt amount and basic rate band, reducing the capital gains tax payable on the sale from £24,640 to £17,530 – a saving of £7,110!

Sorted you would think.

Not quite. As with most things in life, it’s not always that easy. Although the above can work in theory there are dangerous pitfalls which must be avoided to ensure the transaction doesn’t fall foul of HMRC anti-avoidance. This is where specialist tax planning advice required to guide you through the legal maze.

If you need help with this, or have a property transaction with a potential large tax bill whether CGT, Stamp Duty or VAT, speak to us in the first instance by calling 0114 275 6292 or email info@shipleystax.com. We may be able to help you save some money.