Is this considered tax evasion?

[alanchurch123]

This is a theoretical question as I am currently exploring the best way to extract money from my LTD while avoiding the higher rate tax bands.

Lets say that both me and my wife are directors of the LTD company, extracting the full £41,865 p/a each and thus staying within the 'basic' tax band.

If I were to also make my mother a company director (who is now retired), I could also pay her a small wage and dividends up to the £41,865. However, for obvious reasons she wouldn't be able to give any of this money back to me as it would push me over my tax allowance.

With this in mind, could she instead use a portion of this money to rent a house that I would live in?

 

[MarkHopkins]

Wouldn't that just be a "benefit in kind", and therefore taxed in the normal way?

 

[alanchurch123]

Wouldn't that just be a "benefit in kind", and therefore taxed in the normal way?

This I'm not clear on. One website i visited said that benefits in kind are "benefits which employee's or directors receive from their employment". But my mother paying my rent is not a benefit from employment, it is my mother using her income to pay for my rent.

 

[john1989]

Is your mother going to do any work for the company? How do you plan to justify her remuneration?

What does your current accountant think about your cunning plan?

 

[alanchurch123]

Is your mother going to do any work for the company? How do you plan to justify her remuneration?

What does your current accountant think about your cunning plan?

Yes, she would be doing work for the company.

As mentioned, this is only theoretical right now. I'm considering the best way to set up a new company.

 

[ethical PR]

As mentioned, have a word with your accountant and they can advise you on the most effective way to run your business which are both tax efficient and within the law, based on your circumstances.

 

[OldWelshGuy]

Unless the work she carries out is in line with you and your wife, the taxman will be baying for blood.

Do yourself a favour and dump the surplus into a pension, your accountant should be telling you about this sort of thing

 

[alanchurch123]

As mentioned, have a word with your accountant and they can advise you on the most effective way to run your business which are both tax efficient and within the law, based on your circumstances.

I don't have an accountant yet, and am in the early stages of forming a LTD.

The idea just strikes me as an easy way of making additional tax savings. I would have thought it was either legal or not and not based on circumstances?

 

[alanchurch123]

Unless the work she carries out is in line with you and your wife, the taxman will be baying for blood.

Do yourself a favour and dump the surplus into a pension, your accountant should be telling you about this sort of thing

Well, as directors we will be doing very little and I would be putting my mother in charge of our day to day accounts (not returns etc..) so if anything she would be doing more than us.

Problem is that there is going to be quite a lot of surplus and although I will put some into pension, our living costs are quite high and I'd like to avoid the 32.5% tax if possible.

 

[OldWelshGuy]

step back and look at it logically, of Course it is based on circumstances, as that is how HMRC will look at it.

Can you employ family? YES. can directors of a company pay a third party in order to avoid tax? NO.

Circumstances are everything here.

you could make her a shareholder and pay dividends to her that would be acceptable and she wouldn't have to work for the company then.

Paying her a salary though means that in your duty as directors you must act in the best interests of the company, and paying your mam for doing nothing certainly isn't

 

[alanchurch123]

step back and look at it logically, of Course it is based on circumstances, as that is how HMRC will look at it.

Can you employ family? YES. can directors of a company pay a third party in order to avoid tax? NO.

Circumstances are everything here.

you could make her a shareholder and pay dividends to her that would be acceptable and she wouldn't have to work for the company then.

Paying her a salary though means that in your duty as directors you must act in the best interests of the company, and paying your mam for doing nothing certainly isn't

Shareholder is really interesting, I didn't even consider that as an option! Are there any benefits to my wife being a director instead of a shareholder?

 

[MikeJ]

I love the confidence someone has in planning how to avoid tax on profits a company that hasn't been formed is going to make.

Here's an idea. Concentrate on starting the company, and then pay your tax. It's actually the right thing to do.

 

[alanchurch123]

I love the confidence someone has in planning how to avoid tax on profits a company that hasn't been formed is going to make.

Here's an idea. Concentrate on starting the company, and then pay your tax. It's actually the right thing to do.

Condescending statement from someone who has no idea about my personal circumstances.

Registering a LTD is a formality for me getting the best tax relief out of monies already being paid.

If you think that bending over and just paying whatever tax the tax man says you owe without challenging the system is the right thing to do, then good luck to ya.

 

[TheCyclingProgrammer]

Gifting somebody shares always runs the risk of being caught by settlements legislation. Slightly long answer coming up...

The legislation is complex, and often misunderstood IMO, but the main principle is, if the shares are gifted such that the giver (the "settlor") or their spouse/civil partner retains an interest in the shares, or any derived property (such as income, i.e. dividends) then HMRC could seek to tax that income on the settlor.

Additionally, there is an exemption for gifts to spouses/civil partners which means that if the gift is an outright gift, with no strings attached, and that gift is not solely a right to income and the settlor themselves does not retain an interest in the shares, then the settlements legislation won't apply.

In short this means you could give shares to your wife and she could receive dividends - the Arctic Systems case established that as long as those are ordinary shares (with full voting rights and rights to capital distributions) and there are no conditions attached to the shares, then you can do this without any tax implications.

Its often believed that gifting shares to spouse/civil partner = OK and gifting shares to anybody else = caught by the legislation but that's a simplistic, inaccurate view IMO. In fact, if you read HMRC's manuals and guidance on the legislation, it seems to be their view that the settlements legislation is *normally* designed to catch gifts between spouses/civil partners rather than anybody else.

In theory, that you could give away shares to anybody else who isn't your spouse/civil partner but the basic principle stands - if you, the settlor, or your spouse/civil partner, retains an interest in those shares then any dividends would be taxed as if they were yours.

Now this is where things get a bit fuzzy...the definition of retaining an interest in the legislation is quite broadly worded and there's no definitive answer to what this means but if you go by HMRC's own guidance and examples, it would generally be taken to mean that you retain some kind of right over those shares such as a right to have the shares gifted back to you, or a right to any income from those shares - in other words you still stand to directly benefit them.

So if you want to give your Mum shares and she receives the dividends and can do with them as she pleases, then that should be OK. But its not a very effective tax avoidance strategy as the income is going into your Mum's pocket, not yours!

If you were to do this how you propose, with your Mum paying your rent for you out of this income, then its not a stretch to imagine that HMRC would challenge this arrangement by saying you deliberately set out to retain a benefit from the income. In other words, if they could show that it was not a genuine gift but in fact an artificial arrangement designed for you to directly benefit from the dividends on your Mum's shares, you would face a hefty tax bill.

 

[TheCyclingProgrammer]

Shareholder is really interesting, I didn't even consider that as an option! Are there any benefits to my wife being a director instead of a shareholder?

In short: you can make your wife a shareholder, make sure the shares are ordinary shares and an outright gift with no strings attached. She can receive dividends proportional to her shareholding.

If you want to employ your wife and pay her a salary, then she actually has to do some work for the salary, otherwise you risk that the salary not be an allowable deduction from your corporation tax bill (because it's not wholly and exclusively for business purposes).

If you do make your wife a shareholder, it is still normally a good idea to make her either a director or company secretary - this ensures she will be eligible to claim entrepreneurs relief if you ever wind the company up and take a capital distribution.

You really need to speak to an accountant about your options and how to do this properly.

 

[UK Contractor Accountant]

Gifting somebody shares always runs the risk of being caught by settlements legislation..

Who said anything about gifting shares? - its a start up, just get mother to be one of the founder subscribers for Ordinary shares. 100 shares @ £1

You should get an Accountant involved before you incorporate this company.

 

[TheCyclingProgrammer]

Who said anything about gifting shares? - its a start up, just get mother to be one of the founder subscribers for Ordinary shares. 100 shares @ £1

Nobody can say with any certainty that HMRC wouldn't still try and challenge such a contrived arrangement though. A settlement doesn't have to be a gift, it can be any kind of bounteous transaction or arrangement. Shares in a company in which the mother play no real part could be considered a bounteous arrangement.

 

[UK Contractor Accountant]

What contrived arrangement - its a start up!

It May make a million pounds it may loss a million pounds. It may be just the OP's optimism that the company will make loads of money.

 

[TheCyclingProgrammer]

What contrived arrangement

The arrangement whereby he gives his Mum shares so she can pay for his rent out of her dividends. His words, not mine.

 

[MikeJ]

Condescending statement from someone who has no idea about my personal circumstances.

Registering a LTD is a formality for me getting the best tax relief out of monies already being paid.

If you think that bending over and just paying whatever tax the tax man says you owe without challenging the system is the right thing to do, then good luck to ya.

No doubt you'll be this cocky when HMRC are putting you through the wringer, and you're whining about how unfair it all is. Presumably you're happy to use hospitals, roads, the police, etc. You just don't want to pay for them.

 

[Anna Chandley]

The ICAEW run a Business Advice Scheme where you can obtain free advice from a Chartered Accountant. As others have already said, you should take advice from an accountant before incorporating a company.

 

[UK Contractor Accountant]

The arrangement whereby he gives his Mum shares so she can pay for his rent out of her dividends. His words, not mine.

Agreed thats just being stupid and badly worded.

You would look at settlements for grand children and school fees planning etc

 

[john1989]

Is the OP not jumping the gun a bit?

If he hasn't set the company up yet, how does he know what profits are going to be available? Unless of course, he has a very successful existing sole trader business which he wishes to incorporate.

As always, little information and has raised more questions than answers.

 

[MyAccountantOnline]

This is a theoretical question as I am currently exploring the best way to extract money from my LTD while avoiding the higher rate tax bands.

Lets say that both me and my wife are directors of the LTD company, extracting the full £41,865 p/a each and thus staying within the 'basic' tax band.

If I were to also make my mother a company director (who is now retired), I could also pay her a small wage and dividends up to the £41,865. However, for obvious reasons she wouldn't be able to give any of this money back to me as it would push me over my tax allowance.

With this in mind, could she instead use a portion of this money to rent a house that I would live in?

If your Mother is working in the business then I see no problem whatsoever in her being paid a salary either as a director or employee for the work she is doing.

If she chooses to use her own money to pay your rent it wouldn't create any benefit in kind tax charge.

But if it's all a scheme to evade/avoid tax then in a nutshell forget it.

 

[alanchurch123]

No doubt you'll be this cocky when HMRC are putting you through the wringer, and you're whining about how unfair it all is. Presumably you're happy to use hospitals, roads, the police, etc. You just don't want to pay for them.

Putting me through the wringer for what exactly? The reason I am here, on this forum, right now is so that I can find out whether I can extract more of MY money from MY newly incorporated LTD without paying stupidly high taxes. If it can be done and its not going to cause trouble, I'll do it. If its going to cause me hassle I wont.

How about you get off your high horse and go and attack some people on benefits or something. I've paid more than my lives fair share to the tax man already and if I'd have my way I'd move off this dump of an island in a heartbeat. Sadly my wife doesn't feel the same way, so for the time being I'm stuck here paying for losers and low-lifes to sit at home on their arses, for hospitals that give you more diseases than they cure and for a police force that fiddle with kids.

So whether its ok with you or not, I'm going to do everything in my power within the law to tell the tax man where to go.

 

[TheCyclingProgrammer]

So whether its ok with you or not, I'm going to do everything in my power within the law to tell the tax man where to go.

In that case, as several people have said, you would be best taking professional advice before proceeding!

 

[alanchurch123]

In that case, as several people have said, you would be best taking professional advice before proceeding!

Indeed I will. Thank you to everyone except MikeJ for the taking the time to offer your advice.

 

[Bob]

Have a word with PwC. They have a scheme where you only pay tax in Luxembourg

 

[john1989]

PWC make you pay tax? Preposterous!

The best way to extract cash is to pretend you have a second hand car business. Then again, probably not.

 

[alanchurch123]

Have a word with PwC. They have a scheme where you only pay tax in Luxembourg

I've thought about offshore, but its not the 20% corporation tax I have the issue with really. Its extracting the money out of the company without getting super-taxed.

As far as I can tell, offshore doesn't help in this regard?

 

[UK Contractor Accountant]

.Its extracting the money out of the company without getting super-taxed.

As far as I can tell, offshore doesn't help in this regard?

It does if you move offshore - go and live in the Isle of man 20% top rate of personal tax.

 

[alanchurch123]

It does if you move offshore - go and live in the Isle of man 20% top rate of personal tax.

Maybe in a few years, but I'd rather move to the Caymans

 

[OldWelshGuy]

Apologies for my not being clear. When I said 'make her a shareholder' I was thinking along the lines of her buying in at the start, lending you money etc (to justify the shares) then she can sit back and do as she likes.

As for you living rent free, that is easily solved by her buying the property in trust for her grandchildren, so THEY would be living rent free in the house owned by the trust, and you would also benefit (OR you could pay the trust a nominal rent, but if the trust is offshore then HMRC can whistle anyhow). If done properly HMRC would be hard pushed to justify grand parents not providing for their grand children from their investments.

just a thought

 

[Pish_Pash]

Just a theoritical question...how would HMRC have any chance in hell of establishing how many hours the Alan's mum put in? It's not like 'husband/wife + mum" type Limited companies have a 'clock in' / clock out' machine. I predict a very brief conversation *even* if HMRC found out & got hot under the collar....

HMRC: "Does you mum actually work or pretend to work for the company"

Alan: "She works for the company ...in fact she puts in more hours that we do"

HMRC: "Can you prove it?"

Alan: "No, but you are welcome to spend a week with her in her retirement flat...she has a spare bedroom"

Surely there are bigger fish to fry than this scenario?

 

[IanG]

Well, as directors we will be doing very little and I would be putting my mother in charge of our day to day accounts (not returns etc..) so if anything she would be doing more than us.

Problem is that there is going to be quite a lot of surplus and although I will put some into pension, our living costs are quite high and I'd like to avoid the 32.5% tax if possible.

So you want her to do more work than you are but spend her salary on things you will benefit from? Never mind the tax man, make sure she agrees to that first!