Owners of a business and the self-employed often rely on family members to assist with their enterprise. Many shops, farms and consultancies depend on informal labour arrangements with children or a spouse. Formalising the situation with your children may lead to a small tax savings for sole traders.

Family Money reader Mr Tony Keane from south Dublin raised this issue after seeing an article on hiring a spouse or child in Britain. He wondered if the same tax advantages applied in Ireland.

Mr Jim Ryan, personal tax director at accountant Ernst & Young, says the situation is different here. "If a sole trader employs their spouse there is no real advantage because it could generate both an additional employer's PRSI charge and give rise to an employee PRSI charge. No additional personal tax allowances will arise if the person is jointly assessed for tax with their spouse." If, on the other hand, the person employed was one of their children it may be advantageous because each child has an allowance of £3,150 (€4,000) plus a PAYE allowance of £800, he said. These allowances will increase on April 6th when we enter the new tax year.

"This situation takes some of the profit out of a charge to income tax in the parents' hands," says Mr Ryan. Effectively, the reduction of annual profit by the child's salary amount reduces the tax owed by the parents.

To avail of the tax savings, the owner of the business, whether it is a shop or farm, must register as a PAYE and PRSI employer. They may also have to pay employer's PRSI on the wages.

The Revenue is strict about this arrangement and the trader must show any amounts being paid to any family member are for bona fide commercial reasons and must justify the rate of pay.

In the longer term, passing your business on to family members may also mean an inheritance or gift tax bill for them. If your business is passed on to a spouse there is no inheritance or gift tax, but children are a different matter. The transfer of a business to children may give rise to a capital gains tax charge unless the business is transferred through an inheritance. In certain cases, a business may be transferred to the children or nephew/niece in a tax efficient manner subject to certain conditions being satisfied. These conditions are quite detailed and with proper tax planning it may be possible to completely avoid a liability to inheritance or gift tax and even capital gains tax, said Mr Ryan.

For more detailed information, talk to your tax adviser or the Revenue Commissioners.