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Getting a tax deduction for employing your children in your property business

First Published: May 2015 | Available in: Property Articles Your Property Network

By specialist property accountant Stephen Fay ACA

Many property investors need help with managing their business, and involving their children has a number of potential benefits, both financially and otherwise.

This article looks at how investors can get a tax deduction for employing their children, or child in their property business, and how to ensure that this is done lawfully.

What are the benefits of ‘employing’ my child(ren) in my property business?

Tax- relief = lower tax bills

Payments made to children to help with managing a property business are tax deductible for the business, and so a lower tax bill can be achieved – clearly a good result!

Children receive an income tax Personal Allowance (2015 tax year: £10,000 per person), and income up to this limit is tax-free. Therefore, paying children a wage can result in a ‘one-sided’ tax result i.e. a tax deductible expense for the business, but NO tax bill arising on the income by the wage-earner.

Show the benefits of self-employment

Bringing the children into the property business at an early stage allows them to see the day to day reality of running a property business – both the benefits and challenges. In my experience, this often has an inspirational effect on children, and gives them a taste of self-employment which they may not otherwise experience. Think ‘Rich Dad Poor Dad’ – do you want your child’s only influence to be ‘get good grades, get a good job, join the rat race’?

Legacy planning

Many property investors assume that they will pass on their property portfolio to their children – but, will they be interested in that? By involving the children at an early age, this allows time to show them the ropes, inspire them, give them responsibility, learn about all aspects of being both a financial investor, and a landlord.

If the children take to the property business, the investor can then plan to handover a ‘going concern’ business – and so a wholesale sell-off of properties may not be required, since the children will take over the running of the business.

Alternatively, if the children want no part of the property business in the long term (which is sometimes what we hear from the children of our clients!), then at least the sell-off process can be planned, since it will be ‘wealth’, rather than a business, that will be passed on.

What kind of work can my child(ren) legitimately do for me?

Typical work that can be done by children includes:

  • Help with accounts work – logging income and expenses etc
  • Help with filing tasks and general office administration
  • Help with completing ASTs, preparing inventories, checking invoices
  • Help with sourcing and selecting materials from online sources, doing internet price comparison checks etc
  • Help with preparing a property for rental, clearing furniture, old carpets, pre-tenancy cleaning / sweeping etc

Obviously, it makes sense to ease your new ‘employee’ into their new role gently, and ensure that you supervise closely. But, given time and training, it’s often the case that teenagers quickly get to grips with the day to day tasks that a typical property investor deals with.
And, beware … many children are now very computer-literate, and it’s common in my experience for parents to see their children still as small children, when the reality is often that they are capable of far more than their parents imagine …!

OK – I’m convinced, but what are ‘the rules’ – there must be some!

We don’t live in the Victorian era, and so there are plenty of rules in place to protect children while employed, as follows:

Age 13 – 15

Age 13 is the minimum legal age at which a child can be ‘employed’ (assuming the role is not one of ‘performance’ i.e. acting, modelling etc). From age 13-15, a child may only work part-time, and there are restrictions of both the amount of work possible, and its timing: for example, working before 7am, or after 7pm, is banned, as is working in school hours, and working in inappropriate locations e.g. factories, building sites. Thankfully, working in the typical property investor’s home office is allowed”!

There is no National Minimum Wage from age 13 – 15, and National Insurance is not payable until age 16.

Age 16-17

Children from age 16 can work on a full-time basis up to 40 hours per week. The National Minimum Wage of £3.79/hour (as at March 2015) applies, and National Insurance is now payable (if the child’s wages are >£153/week – as at March 2015).

Age 18+

The National Minimum Wage of £5.13/hour (as at March 2015) applies – your child is now an adult! As well as being entitled to a pay rise, all the employment rights and rules affecting adults now apply.

What about payroll taxes and PAYE deductions?

For payments of £5,772 per annum per person, there is no need to operate a formal PAYE scheme (as at March 2015).

Most property investors – certainly those not operating through a company – don’t have a PAYE scheme in place, and given the above fairly generous wage cap, don’t need a PAYE scheme. Those investors who already operate a PAYE scheme would add the new employee to the payroll and administer the wages in the usual way (i.e. if you have a PAYE scheme, this applies to all employees).

For those investors who don’t operate a PAYE scheme, it is still important to keep proper records of hours worked, wage rate paid, total paid etc. Remember, by including wages paid to children in your accounts and tax returns, you make these payments business expenses which can be scrutinised by all relevant authorities, as well as HMRC.

And finally …

It goes without saying that wages paid to children must be for actual work done – it would be tax fraud to include fictitious payments in business accounts to claim these as a tax deduction. In particular, it is important that payments are actually made, and ideally direct to the bank account of the child, by way of evidence of payment.

Ensure that you keep records of the work completed, and of course pay a wage rate that is sensible, bearing in mind the work being done, and age and experience of the employee (no £100/hour payments made to your 13 year old for undefined “admin”, which then miraculously makes it’s way back into the investor’s hands!).

Summary

Involving children in your property business can be a great way to utilise your child’s Personal Allowance, receive a tax deduction in your accounts, provide genuine paid work to a young person, and motivate and inspire the next generation of property investors. On a personal note, my 4-year-old loves bringing his Fisher Price hammer set with him to see Dad’s latest property, and my 6-year-old loves coming on viewings with Dad … it’s all good fun, even if I can’t yet pay them both a wage!

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