Transfer money from my company to my children via redundancy....?

NMM1975

I've recently been doing consultancy work and my fees have been paid to a limited company I set up for this assignment. I'd like to pass some of this money onto my children (one a higher rate taxpayer, the other a lower rate taxpayer).

To maximise the amount they receive I've been advised to employ them both for a period of time (and them paying tax on the emoluments) and then making them both redundant which would enable me to make a tax free payment to each of them.

This idea was provided to me by a reputable accountant but I'm looking for a second opinion. It sounds to me that this would be tax avoidance (using the rules to my advantage) but not evasion (which I most definitely DO NOT want to do).

Any thoughts?

Elaine_Wilson

I have no practical experience of this so these are just a few initial thoughts.

It sounds like avoidance, rather than evasion, to me so I doubt it is illegal.

Having said that, I think its success will depend on the figures involved. For example, let's say you employed them both for two years on a salary of £2,000 pa each. Then you make them redundant and pay them £30,000 each. I'm not sure if they could be brought into tax on these amounts but I feel sure HMRC will seek to disallow a large chunk of the payments in the corporation tax computation. The payments would not be wholly and exclusively expended for the purposes of the business.

As to what would be reasonable figures I'm afraid I have no idea.

chrismac1

http://www.hmrc.gov.uk/manuals/eimanual/EIM13785.htm

This sound like a creative accountancy idea. I doubt if it would meet the HMRC tests on redundancy, and if your reputable accountant thinks he can get HMRC to approve this scheme in advance - which is best practice - good luck to him or her!

heretolearn_2

Interesting idea but I'm not sure I'd want to take a client down that route - straying dangerously close to tax evasion, I'd say.

You do realise that they won't pay tax on money you give them as a gift anyway, don't you? Unless you are planning on dying in the next 7 years that is (then inheritance tax may be payable on part of it.

Also
Regular gifts or payments that are part of your normal expenditure
Any regular gifts you make out of your after-tax income, not including your capital, are exempt from Inheritance Tax. These gifts will only qualify if you have enough income left after making them to maintain your normal lifestyle.
These include:
monthly or other regular payments to someone

If you are thinking of doing it the way you suggest so that you are paying them out of your pre-tax income, well yes, but then you'll have to maintain them on payroll for a reasonable while paying tax and NI on that anyway, so do the sums carefully.

What type of work would your children be doing for your company? It would all need to be set up in a genuine way, not just a paper exercise, in case of HMRC investigation. The last thing you want is to get done for tax fraud.

Does your accountant offer an insurance plan to cover fees etc in case of HMRC investigation and would the underwriters be willing to cover this as part of it?