Income Shifting with Family member not spouse

[heyindy]

So I have been contracting for over a year now, about to submit my End of Year Company Accounts and personal Tax Return but am now looking to the future. I've had to revisit everyone's second favourite subject after IR35, yes Income Splitting or Shifting.

My Mum has been helping me out with a lot of my admin stuff for much of the year, including preparing and sending invoices, answering phonecalls, chasing new business. I have been actively going out and working and bringing in the money. I want to make her a shareholder in my company and be able to pay her dividends.

Now, I know from reading a lot and speaking to various accountants that typically it is said that Husband-Wife arrangements are exempt to the rule of gifting shares to family members (“Gifts between spouses are, in theory, exempt"). So, how will the idea of making my Mum a shareholder come across to HMRC? I understand that legally you can make anyone a shareholder but can alert HMRC to look into your business.

I am set up as single shareholder in my company (at the time of incorporation), so will gifting shares to my Mum, someone who works for the company, again raise any flags? I understand that the weight of whoever does the most work should refect in the split of shares (eg.60-40 or 70-30).

A related issue, if I go ahead with this, would be that she currently works full time and earns around 20k, so I can either pay her a Salary (in addition to her current one), on which she would be subject to NI and tax, or preferably, a dividend. Considering we are now into December, so only a few months of the tax year left, would the timing of issuing shares and a dividend again cause problems here? My end of company year is the end of August.

Other options include her invoicing me for the work she has done and declaring this in her own self assessment.

Can anyone advise of whether this looks feasible or whether it would be likely to raise an alarm to those that care.
Any help would be gratefully received.

[Clare@InTouch]

A husband & wife are specifically exempt from Section 660a, other people are not. HMRC would likely take a dim view to this as it's not being done for any commercial reason, it's purely tax motivated, and it's not something you'd do for anyone other than your Mum. The risk is that HMRC would investigate, decide it's a settlement, and tax it as if it had been yours in the first place (plus add interest and penalties).

There may be tax issues related to giving her shares too, as gifts between unmarried people are not exempt from tax in the same way as gifts between spouses are.

There's no benefit in her invoicing the company and declaring the income as self employed because she'd pay more in tax & NI than you'd save in CT.

[rd409]

A husband & wife are specifically exempt from Section 660a, other people are not. HMRC would likely take a dim view to this as it's not being done for any commercial reason, it's purely tax motivated, and it's not something you'd do for anyone other than your Mum. The risk is that HMRC would investigate, decide it's a settlement, and tax it as if it had been yours in the first place (plus add interest and penalties).

There may be tax issues related to giving her shares too, as gifts between unmarried people are not exempt from tax in the same way as gifts between spouses are.

There's no benefit in her invoicing the company and declaring the income as self employed because she'd pay more in tax & NI than you'd save in CT.

If I remember correctly the post from NW in another thread, the NI threshold is per job and not per person. So the salary here upto £7k would be below the NI threshold. So the tax you might end up paying would be equal to CT, so would be roughly similar to issuing dividends. Correct me if I am wrong here.

[heyindy]

Thanks Claire for the lightning quick response.

So even if the money paid to my Mum was solely for her there would be an issue? I suppose that would only be discovered in an investigation though, and they would still have reason to suspect foul play.

Anyone else out there who does have shares split with someone other than their spouse?

[Clare@InTouch]

If I remember correctly the post from NW in another thread, the NI threshold is per job and not per person. So the salary here upto £7k would be below the NI threshold. So the tax you might end up paying would be equal to CT, so would be roughly similar to issuing dividends. Correct me if I am wrong here.

Self employed NI is different than employed NI, which makes that route not worth while.

Adding in a salary would be tax neutral because the income tax would offset the CT, and you're correct about the NI.

[heyindy]

... as it's not being done for any commercial reason, it's purely tax motivated, and it's not something you'd do for anyone other than your Mum.

Claire what do you mean by any commercial reason?

[TheFaQQer]

Claire what do you mean by any commercial reason?

If you employed someone who wasn't related to you to do this same work, would you be considering giving them shares and paying them a dividend?

[rd409]

Self employed NI is different than employed NI, which makes that route not worth while.

Adding in a salary would be tax neutral because the income tax would offset the CT, and you're correct about the NI.

True. Agree to that. What I was suggesting was, that instead of handing out shares to OP's mom, OP can give out a salary, and put it as an expense to the company. That would prevent the Income split issue on table.

[Clare@InTouch]

Claire what do you mean by any commercial reason?

It's the difference between doing something for a genuine business reason, say because you're introducing an income generating business partner, and doing something purely for tax. If your Mum was anyone else, a normal person you employed from the street so to speak, you wouldn't be giving her dividends as a reward for the work she's doing.

[heyindy]

I see. Thanks for your help guys.