Are you a volunteer tax payer? Could you pay less tax?
The forthcoming budget is widely touted as being likely to increase the UK tax take, in the face of worsening pressures on government debt and difficulties in increasing cuts in public spending. Could you pay less tax?
It has been said about inheritance tax (IHT) that it is a voluntary tax; paid only by those who can’t bring themselves to do what they need to in order to avoid it. Whilst this is – in theory at least – largely true, it’s not just IHT that you need not pay. Here’s a tongue-in-cheek guide to paying less or no tax – but note that you should not assume that what follows would apply to any particular individual or set of circumstances – as ever, take specific expert advice before acting!
Let’s start with the easy one! Relatively simple to say how IHT can be avoided – give it all away! Or, more specifically, give away everything that would otherwise be chargeable and either give it all to your spouse/civil partner, a charity (including one you set up), survive the gift by 7 years, or take out a reducing term assurance policy to cover the tax if you don’t survive. Marrying or taking a civil partner just to take advantage of the exemption for those gifts is more common than you might imagine – if Mr Osborne (George, that is) thinks that a married/ civil partner tax allowance worth up to £835 is sufficient to encourage marriage or partnership then the prospect of saving 40% of your entire worth certainly is! Note that there are lots of reliefs and exemptions that you should maximise before gifts.
There are many ways of reducing income tax – it is riddled with loopholes, reliefs and exemptions, any combination of which may cut your income tax bill to zero. From making pension contributions to swapping income for capital gains, there are any number of strategies, some of which are not just tolerated but in fact actively encouraged! But there are also common (if not entirely straightforward) single strategies that are used over and over again. Using a limited company to sell your expertise is perhaps the simplest and commonest and despite the forthcoming income tax charge on dividends, it can still be used to great effect. Often combined with sub-strategies like paying pension premiums or taking loans from the company instead of income and as a result, a large number of those using this strategy pay no income tax at all (or national insurance for that matter; though that’s a different matter). Less straightforward but still effective is becoming non-resident in the UK for income tax purposes – not always possible but certainly effective when it is (for UK taxes at least). One common strategy is to use the company to kick the can down the road until retirement abroad – earn now, spend later, at some other tax rate than the 45% top rate here!
This can be a tricky one – CT is a relatively straightforward tax, with few loopholes or allowances to exploit. But that doesn’t stop some household names routinely avoiding UK CT on vast profits – double Irish with a Dutch sandwich anybody? Whilst that particular arrangement is being phased out, there are lots of clever folks creating replacements – watch out for the Singapore sling! All you need is for there to be enough at stake to pay what it costs to set up one or more non-UK companies to pass profits abroad, where they are taxed at much lower rates, or even zero. This is often done by creating costs payable by the UK operation to some low tax company, generally for such overheads as interest on loans or licencing fees for intellectual property etc. For every household name doing this, there are dozens you have never heard of – whilst low tax regimes are leant on by the UK and others and transfer pricing rules make the process less straightforward, there seems to be no shortage of new tax havens for the circus to move on to and many of these offer zero corporate taxation to companies registered but not actually operating there. For those without the means or inclination to go down that route, the usual strategy is to avoid CT by passing the profits out to the directors in some fashion and then using the income tax strategies above to avoid that tax too.
Capital Gains Tax
Turning income into capital gains has long been used as a tax avoidance strategy in its own right, given the more generous reliefs and lower tax rates compared to income tax. But avoiding CGT itself has been big business ever since it was first introduced in 1965. Common strategies include splitting ownership and disposal to use multiple allowances, holding over or rolling over gains, swapping assets into CGT favoured ones attracting exemption (gold sovereigns, vintage cars amongst others) or reduced tax rates (business assets – including some shares, land and buildings etc). But CGT can also be entirely avoided by making gifts to a spouse/civil partner/charity (see IHT above). Unlike IHT though, there is no CGT on death, a fact that is often used in conjunction with IHT planning to ensure that both taxes are avoided on lifetime gifts and assets held on death, so neither is paid. Non-residency is also used to avoid CGT – the rules are different from those applying to other taxes but the strategy is straightforward – go, sell, stay non-resident for 5 tax years and UK CGT is avoided. Note that being non-resident doesn’t mean not being here at all – non-residents can spend large amounts of time in the UK whilst avoiding vast amounts of CGT.
Another tricky one – perhaps the most fraught of all, because it has become so expensive in recent years. Stamp Duty/SDLT (and Scottish equivalent) avoidance has become a real battleground as HMRC seek to up the tax take on Real Estate that’s difficult to hide. Some years ago rates of Duty went up, and rich buyers of expensive property responded by using offshore companies to hold the property, leaving a sale of the shares liable at 0% or 0.5%. HMRC countered that by introducing a 15% charge on acquisitions by offshore companies, the buyers respond by switching to LLP’s, reducing the liability to no more than 7% on first acquisition and 0% on future sale. And so the dance goes on. There are also a number of other commercial schemes available which claim to avoid duty too; though, as ever, caution and independent advice are essential. What is certain is that there are a number of reliefs and exemptions that need to be maximised where possible. Perhaps the commonest ones are the exemptions for property up to certain values and the total exemption for gifts, including on death. Note that the latter is not just for gifts between spouses/civil partners and is thus more generous than the CGT/IHT equivalents.
Words of caution!
Don’t rely on any of the above! Take professional advice that is specific to your circumstances and always be aware of the difference between officially sanctioned tax avoidance schemes (like pension contributions and share option schemes for example) at one end of the scale and the most-definitely-not-officially sanctioned schemes at the other end. Whilst it would be wrong to automatically take at face value all of HMRC’s pronouncements about the ineffectiveness of some tax avoidance strategies, it would be naïve to assume that they aren’t provocative and liable to challenge, particularly if not implemented correctly. If you do something, please do it with your eyes open.