Tax matters: New car for a family member, without a bigger bill for you

Buying a car can be costly, especially where it's a "second car" being purchased for a spouse or perhaps for a child who is away at university. Fortunately, HMRC can help make it a little less expensive if you run your own company and the car could be provided through the business.

You may shudder at this idea because it raises the spectre in many minds of a large benefit-in-kind tax charge, and even more so since that charge will be on you as the parent and business owner, at the highest rate of your tax liability.

But with a degree of compromise as to the cost and type of car involved, the end result could be very acceptable.

For years now the government has been encouraging us all to think "green" in terms of the type of cars we run.

Proof of this is to be found in the current regime for taxing company cars. Previously, the tax treatment of a company car depended upon whether the vehicle was both needed and used for company business, with discounts given for heavy business mileage. However, nowadays the tax charge for being provided with a company car is based solely on its carbon dioxide (CO2) emissions.

Let's assume that you own your own company and have a daughter studying at a distant university. You want to give her a car so she can visit home more often and opt to supply her with a company car costing 10,000, rather than pay for it personally.

If the CO2 emissions of the company car are nil, such as with an electric car, the benefit-in-kind tax charge is also nil. Cars with emissions up to 75g per kilometre attract an annual benefit charge of 5 per cent of the list price of the car when new; emissions of 76g-120g per km will result in a charge of 10 per cent, and those at 121g-130g are charged at 15 per cent.

After that there is an additional 1 per cent for each 5g of CO2, and a further 3 per cent if the car is diesel. Clearly you won't be looking at a new Range Rover diesel, but the figures are attractive for those more modest in their aspirations.

If you are a 40 per cent taxpayer, the "true" cash cost to you of supplying your daughter with a 10,000 car with emissions of 121g-130g per km will be 600 a year (ie, 10,000 x 15 per cent x 40 per cent). This charge covers all expenses paid by the company other than fuel. It specifically includes motor insurance and, taking into account the insurance premiums for your daughter (with no no-claims bonuses), you would be well in pocket on this item alone.What about those who do not own a family limited company, but instead are in a sole trader business or a partnership?

Take the example of a wife who receives a modest salary of 5,000 a year, for assisting with the business. The owner, her husband, decides to provide her with a low-emission car and pay for the running expenses through the business.

HMRC may attempt to tax the wife, but because the value of her remuneration package remains short of the 8,500 limit below which no benefit-in-kind charge is levied, she will remain outside the scope of the rules.

HMRC may then seek to tax the husband. However, as he is not a director, but a partner or sole trader, the benefit-in-kind rules cannot apply to him either. In the case of his own car, the business will suffer a tax disallowance for the proportion of the car's use which relates to private mileage, yet no such disallowance can apply to him on someone else's car.

Under those circumstances, the wife's car becomes completely tax free.

Consequently, where a business is run though a partnership or a sole tradership, it may be possible to provide a car to a low-paid member of the family with no tax charge on that person, nor on anyone else.

l Ronnie Ludwig is a partner in the Edinburgh office of Saffery Champness Chartered Accountants and chairman of the firm's private wealth group.