You employ several close family members in your business. The company already pays into a workplace pension for them but might there be a tax advantage to increasing the contributions?
Giving away your wealth
It’s fairly common knowledge that gifts you make to others, including family members (apart from your spouse), within seven years of your death remain part of your estate for inheritance tax (IHT) purposes. Despite this many people leave IHT planning so late that they risk getting caught by the seven-year rule. This can cost their beneficiaries, typically that’s family members, 40% in tax on at least some of their estate. However, there are a few exemptions which might help a little.
Small gifts
While small gifts can be immediately exempt from IHT, there’s no need to wait seven years, they usually carry conditions that limit the circumstances in which you can use them. The exception is the annual exemption, which has no conditions. The trouble is it only applies to gifts of up to £3,000 per year.
Immediately IHT free
While the minor exemptions can chip away at your estate, if you run your own business, whether that’s a sole trader, company or in partnership, and you employ people (family) who you intend to leave some of your estate to, there’s a way to make larger gifts which will immediately fall out of your estate for IHT purposes.
Tip 1. You can make regular contributions to family members’ pensions out of your excess income. These immediately fall out of your estate for IHT purposes. However, if you own a business there’s a more tax-efficient way to do this.
Tip 2. Payments into employees’ pension funds don’t count as transfers of value (gifts) for IHT purposes. So if you employ people who’ll be beneficiaries of your estate, you can make substantial payments to registered pension plans which escape IHT. By paying the contributions direct from your business, rather than from your personal income (on which you and your company between you might have paid NI contributions of up to 25.8%), it’s tax deductible from business profits and NI doesn’t come into the equation.
How much can you contribute?
Within reason you can pay what you like into a pension plan for family employees, but it’s probably advisable to make it a regular part of their remuneration package. Say, for example, you pay your two sons £45,000 per year, you could add another £15,000 in pension contributions without HMRC raising an eyebrow. The money in the pension fund grows tax free, as will 25% of what they take from the fund when they are old enough, i.e. when they reach 55.
Tip. You could even use this arrangement for your teenage grandchildren. Put them on the payroll for cleaning your company car and doing odd jobs around your office. As part of the remuneration package you can pay into a pension for them. It doesn’t have to be part of your firm’s main scheme, but the contributions you make should be as an employer, not as an individual.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.