When looking at a typical family business (or any business for that matter) what I see most often is that no thought at all has been given to the structure. Whether it be a small partnership, or quite an involved corporate entity, usually we see Mum and Dad being the controlling interest in all things. Now this occurs for obvious reasons, as most family businesses are set up by Mum and/or Dad, they also usually grow from small acorns to (in some cases) mighty oaks, and whilst this is happening all the focus is on making the business (i.e. the products or services being supplied to customers) work.
What is often not looked at, or even considered at all by some, is how the business can be best structured to remunerate all those involved with the minimum of tax. A nice little ruse that I have written about before is that of using a combination of alphabet shares and a family trust to help pay for your children's university fees.
Now alphabet shares are pretty simple, insofar as you will have several classes of share that each have different dividend rights. Typically these are referred to as A shares, B shares and so on. By creating a different class of share, that means you can pay a different dividend out on the B shares to that paid on the A shares, this is important as otherwise you'd have to pay yourself and the children identical amounts. As the children have their own personal tax allowance (and basic rate tax band) you can pay them gross dividends of up £41,865 (2014/15) if they have no other income. If you were to take out that extra income it would cost you at least a whopping 25% extra in income tax!
Okay, so you understand the alphabet shares, but why the trust, aren't they really complicated and get you into lots of trouble with the tax man? Well, the short answer to all of those questions is no, but let me explain. HMRC don't actually dislike trusts, they just dislike people abusing them. The reason we use trusts for this type of plan is that it lets you keep control of the shares in your business, whilst deferring the dividend to your children, all perfectly legal and above board. After all, you wouldn't want them to physically own part of your company whilst they are still so young (and prone to making financial mistakes) would you? A trust gives you the best of both worlds by benefiting from having the dividend taxed on your child, but you still controlling the shares.
I know this is only a very small piece of planning, but even if you were only covering their tuition fees by using this you would save typically £6,750 on a three year course with tuition fees of £9,000 a year.
This is just the beginning of what you can do, just think what we could achieve by looking at and reviewing all of your current business and financial structures. Despite what you've heard in the Daily Mail tax planning isn't bad for your health!
Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone.
Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone.
