Tax Planning for Family Companies

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Family Company Tax Planning for Directors and Shareholders

By Sarah Bradford BA (Hons), FCA, CTA (Fellow)

Tax planning for a family company has to look at two positions at once: the company itself, which pays corporation tax on its profits, and the family members behind it, who may be its directors, shareholders and employees, and who may pay tax and National Insurance on the profits they take out. Decisions made at every stage, from the share structure chosen at the outset to the way the business is eventually passed on or sold, affect how much tax the company and the family pay.

Written by Chartered Accountant and Chartered Tax Adviser Sarah Bradford, this practical guide explains the corporation tax charge on a family company and legitimate strategies to minimise it, how to obtain relief for losses and the company's obligations as an employer. It also suggests a strategy for the tax-efficient extraction of profits, explains what happens if a director's loan account is overdrawn, and highlights the valuable reliefs available when the business is passed on to the next generation or sold.

What Is a Family Company?

A family company is a limited company owned by a family and used to run the family business. Family members may be its directors, its shareholders and its employees, and the company may also employ people from outside the family. While some sizeable businesses are family-owned, the vast majority of family companies are small companies, and many family businesses have been in existence for several generations.

The company is a separate legal entity from the family that runs it, with its own tax obligations, so business and personal matters must be kept separate. Most family companies are also close companies, broadly companies controlled by five or fewer participators (in the main, shareholders), and this imposes additional obligations, particularly where directors' loans are outstanding.

Family Members, Share Structures and Tax Traps

Some of the key decisions are made when the company is set up. An alphabet share structure, with A ordinary shares, B ordinary shares and so on, allows different dividends to be declared on different classes of shares, which can be very useful from a tax planning perspective. The parents may keep full voting rights while the children hold shares entitled to dividends only, but where shares have restricted rights, this may compromise the availability of business asset disposal relief if the company is later sold.

How family members are paid matters just as much. Employing family members who have some or all of their personal allowance available increases the profits that can be extracted tax-free and for minimal National Insurance cost. A company whose only employee is also a director cannot claim the National Insurance employment allowance, so it may be worthwhile having more than one family member on the payroll. It can also be beneficial to make family members shareholders where they have not used their dividend allowance in full.

The traps are just as real. In a close company, a loan to a director that is still outstanding nine months and one day after the end of the accounting period triggers a section 455 tax charge on the company, and a loan balance of more than £10,000 at any point in the tax year can bring a benefit-in-kind charge as well. And without planning well in advance, valuable reliefs such as business asset disposal relief and business property relief may be lost when the time comes to hand over the reins. A failure to plan ahead may prove costly.

What This Report Covers

In seven chapters, with 13 worked examples and more than 50 practical points, this guide covers:

• Setting up and structuring a new company
  • Deciding on the share structure
  • Incorporating an existing business
  • Selling assets to the new company
  • Incorporation relief
  • Capital allowances
  • Plus more...
• Corporation tax
  • Determining the accounting period
  • Deductible expenditure
  • Disallowable expenditure
  • Pre-commencement expenses
  • Annual investment allowance
  • Writing down allowances
  • The section 455 tax rate
  • Plus more...
• Relief for losses
  • Offset against profits and gains of the same accounting period
  • Carrying a trading loss back
  • Carrying a loss forward
  • Terminal loss relief
  • Plus more...
• The family company as an employer
  • PAYE
  • National Insurance employment allowance
  • Student loan deductions
  • Paying tax and deductions to HMRC
  • Benefits in kind
  • PAYE Settlement Agreements
  • Plus more...
• Tax efficient extraction of profits
  • Setting the salary level
  • Extract further profits as dividends
  • Other ways to extract profits in a tax-efficient manner
  • Plus more...
• Directors' loan accounts
  • What is a close company?
  • Outstanding directors' loans and the section 455 tax charge
  • Making use of a director's loan
  • Beware a benefit in kind tax charge
  • Lending money to the family company
  • Plus more...
• Planning ahead
  • Business asset disposal relief
  • Business property relief
  • Plus more...

Take a look inside this report to see further details of what is covered.

Setting up the company and choosing the share structure

The questions to settle before the company is formed, registering it, and deciding on the number and classes of shares, including alphabet shares and preference shares. The guide explains the responsibilities of directors and the company secretary, and what to consider when a family member incorporates an existing sole trader business: selling assets to the company, incorporation relief, capital allowances and keeping the existing VAT number.

Corporation tax, capital allowances and losses

Registering for corporation tax, setting and changing the accounting period, and working out trading profits, including deductible, disallowable and pre-commencement expenses. The guide covers the annual investment allowance, full expensing and other capital allowances, the company tax return and CT600A pages for close companies, the small profits rate and marginal relief, and the options for relieving a trading loss, including terminal loss relief.

The family company as an employer

The obligations that come with paying even small salaries to family members: PAYE, Class 1 National Insurance, the employment allowance, student loan deductions and statutory payments. The guide also covers Real Time Information reporting, auto-enrolment and benefits-in-kind, from P11Ds and Class 1A National Insurance to PAYE Settlement Agreements and mandatory payrolling of benefits from 6 April 2027.

Salary, dividends and other ways to extract profits

The popular strategy of paying a small salary and taking further profits as dividends, how to set the optimal salary and what difference the employment allowance makes, and how an alphabet share structure lets dividends be tailored to each family member's circumstances. The guide also looks at tax-exempt benefits-in-kind, electric company cars, rent for a home office and employer pension contributions.

Directors' loan accounts and the section 455 charge

What makes a company a close company, when section 455 tax arises and how it is reclaimed, and the tax cost of clearing a loan by introducing funds, a bonus, a dividend or a write-off. The guide shows how up to £10,000 can be borrowed for up to 21 months free of tax and National Insurance, when a benefit-in-kind charge arises, and what to consider when a director lends money to the company instead.

Planning ahead: business asset disposal relief and business property relief

The conditions for business asset disposal relief on a sale of shares, which must be met for at least two years, and how a transfer between spouses or civil partners can give access to both partners' lifetime limits. The guide closes with business property relief, which can prevent an inheritance tax liability when shares in a trading company are passed on, and the cap on 100% relief from 6 April 2026.

Who Will Benefit From This Report?

This guide is for those considering whether to start a family company or incorporate an existing family business, as well as current directors and shareholders of family companies who would like practical tax planning tips and strategies. It is also a useful reference for accountants and tax advisers with family company clients.

If you run a family company, or are thinking of starting one, this guide belongs on your shelf.

About Sarah Bradford FCA CTA

Sarah Bradford BA (Hons), FCA, CTA (Fellow) is a Chartered Accountant and Chartered Tax Adviser. She is the director of Writetax Ltd, a company providing technical writing services on tax and National Insurance.

Sarah writes widely on tax and National Insurance and contributes regularly to Business Tax Insider, Property Tax Insider and Tax Insider Professional. She is also the author of several other Tax Insider guides, including Tax-Efficient Profit Extraction for Companies, Directors' Loan Accounts Explained, Property Company V Property Trust, How to Maximise Deductions for Business Expenses, 101 Business Tax Tips, 101 Practical Tax Tips and 101 Employee and Employer Tax Tips.

Read an excerpt from this report: Tax-efficient extraction of profits.