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Extracting Money From The Family Business

Care must be taken not to fall foul of HMRC rules ...

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POSTED BY HELEN BEAUMONT ON 27/02/2019 @ 8:00AM

Many people want a family business that will benefit their spouse and children. But how do you extract money from it?

Be careful when extracting money from the family business. HMRC will want to see that it's been earned!

Be careful when extracting money from the family business. HMRC will want to see that it's been earned!

copyright: thodonal / 123rf

Business owners may decide to trade immediately as a Limited company or incorporate their sole trade or partnership as it grows. However due to the double taxation when extracting profits, it isn’t for everyone.

"incorporation should be considered for commercial reasons not just for tax-saving purposes!"

When you're a company director, there are different tax considerations than for when you are self-employed or in a partnership. The most popular question I get asked is about how to extract profits from the family business in an Income Tax and National Insurance efficient way. Here are some thoughts:

  • Pay a salary to a spouse

    An efficient way to reduce a company's tax bill is to pay a small salary to the director's spouse. But care must be taken to ensure payments do not fall foul of 'settlement rules'. If you want to pay your spouse, then keep the payments sensible, or else HMRC will take an interest and want to see that they've earned it.

    Salaries must be paid into the spouse's own bank account (no access by the director) and appropriately recorded as a payment to another employee. You will also need to run a PAYE payroll and comply with RTI requirements.

  • Outright gifting

    As long as the spouse (or child over 18) has complete control of a gift (either money or assets) then you won't be caught by the settlement rules because you are not retaining an interest in it.

    The need to have 'whole rights' to dividends, voting, capital and be able to wind up the company. If HMRC believes the director has any control over the gift then they will not allow the tax saving.

  • Distribution of dividends to a spouse or children

    Director shareholders are able to pay dividends to themselves on profits the limited company generates. If you wish to pay a dividend to a spouse or child, each individual must have ordinary shares in the company and the size of the payment is generally based on the size of the shareholding.

As limited companies are separate legal entities, great care must be taken when extracting money from the business. It is very easy to fall foul of HMRC rules and end up getting a penalty, a fine or even prosecuted.

"Would you like to know more?"

If you'd like to find out more about extracting money from your family business then do give me a call on 01908 774323 or click here to ping me an email and let's see how I can help you.

Until next time ...

HELEN BEAUMONT


PS:

If you're looking to work with an expert tax advisor with a wide range of tax experience, do visit www.essendontax.co.uk to find out more about me and discover how I can help!


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More about Helen Beaumont ...

Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.

Tax Planning can make a considerable difference to your tax liability. Helen’s specialist knowledge in tax planning and experience ensures every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.

When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.