Taxing timesPosted on: 25 February 2015 by Steve Wanless
Steve Wanless examines how the line are being blurred between tax efficiency and large scale tax avoidance and tax evasion.
Once again, the blurred edges of “tax avoidance” and “tax evasion” have been highlighted. The waters have been muddied to such an extent that making any effort to save tax might be regarded as “dodgy”.
It started with the revelation that the bank, HSBC, had been assisting clients to put (hide) money in secret Swiss bank accounts, then the tax inspectors at HMRC failed to prosecute a UK resident who had not submitted a tax return or paid any tax for 24 years.
The chairman of HSBC during this problem time was Stephen (Lord) Green who was appointed as a trade minister in the Coalition (and made a life peer) in 2010 by David Cameron. The Prime Minister has refused to confirm whether he discussed “tax avoidance” with Green before his appointment.
A few days later Labour’s shadow chancellor Ed Balls entered the avoidance debate by admitting that he always asked for a receipt, even if it was just the £10 charged to cut his hedge, because it was the “right thing to do.”
Labour leader Ed Milliband was dragged into the controversy because it was discovered that a “deed of variation” had been used to change his father Ralph’s will after his death in 1994.
Originally, the family home had been left entirely to Ed’s mother, and as Ralph’s wife, anything she received was free of inheritance tax. The will was changed to give 20% of the ownership to Ed and 20% to his brother, David.
Basically, the Millibands were being tax efficient; the “deed of variation” meant Inheritance Tax would only be due on 60% of the property when the surviving parent died.
“Deeds of variation” are perfectly legal – although Gordon Brown, when chancellor described them as “tax abuse”. Strangely, despite so much time at No 11 Downing Street, and rather less at No 10, Brown did not abolish them.
The HMRC website says the reasons for using a “deed of variation” are to reduce IHT or capital gains tax (CGT), to benefit someone left out of a will, moving assets into a trust or to clear up any uncertainty.
Changes can only be made if all the beneficiaries of the estate agree. Often the deed is used if a person dies prematurely or suddenly, and the beneficiaries agree to make the will more tax efficient.
It now seems as if any sort of tax avoidance is viewed as sharp practice, even when acting legitimately.
As your Independent Financial Adviser (IFA) will be only too happy to point out there are a variety of ways of reducing your tax bill. Many set-up and promoted by the chancellor of exchequer himself.
Currently, you can put up to £40,000 a year into a pension; you will receive tax relief on these contributions at your highest marginal income tax rate (up to 45%). Your pension pot does not attract income tax or CGT as it grows – and there’s a 25% tax-free lump sum available when you start taking your pension.
Up to £15,000 a year can be put into an Individual Savings Account (ISA) – and gains are free of CGT. The investment can be in cash, or in stock and shares – or a combination of both.
Stocks and shares are not completely tax free; when any share dividend is added, 10% tax has already been deducted, courtesy of one of Gordon Brown’s less generous gestures when Labour chancellor.
The current level for CGT before tax is paid is £11,000; £22,000 for couples. Beyond the exemption, tax is charged at 18% for basic rate taxpayers and 28% for those who pay the higher rate.
Both Venture Capital Trusts (VCTs) and the Enterprise Investment Scheme (EIS) are popular ways of investing, largely because of the tax advantages.
Up to £200,000 can go into VCTs, which invest in small unquoted companies. There is up-front tax relief, no tax to pay on any dividends and no CGT when sold, provided the money has been held for five years.
The EIS allows an annual investment of £1 million, with upfront tax relief of 30%. Like VCTs, there is not CGT to pay, in this case provided the investment has been held for three years. An EIS investment attracts no IHT if held for two years, but income tax is paid on any dividends.
Of course, we return to IHT, where 40% is paid on the value of your estate above £325,000 - £650,000 can be used by the surviving married partner provided the first deceased has not used any of that allowance. There is no IHT due between married couples.
For many in the south of England, especially in London, the entire allowance, and more, will be taken up by the value of your house.
That can make taking equity out of your home, even in the later years, financially attractive, although the wise counsel of an IFA is always recommend so the implications of such a move are fully understood.
Individuals are allowed to give away gifts of £3,000 a year – and any amount will be exempt from IHT provided the donor survives for seven year. Gifts out of income are permitted, provided that doesn’t impact on your standard of living.
“Tax evasion” has always had a bad name, mainly because it is illegal.
In many ways it’s unfair that “tax avoidance” is also being tarnished, especially when many of the options for saving tax originate at the government’s door.
Still, the headlines keep on coming. “Nina Ricci heiress ‘not aware’ she had $22m in Swiss account” recently appeared in The Times.
Arlette Ricci was one of the names supplied to the authorities by whistleblower Herve Falciani, the computer engineer who fled to France in 2008 with information on more than 100,000 accounts held at HSBC Suisse Private Bank.
Ricci faces 10 years in jail if found guilty of tax fraud in the Paris Criminal court.
She might have had a better chance in the UK. It has been revealed that of the 6,800 names HMRC received over five years ago with Swiss bank accounts, only one person has been prosecuted. How unlucky can you get!
The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage
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