13 April 2016

Avoiding Tax - How far should you go?

The current debate on avoiding tax shows no sign of stopping, and in many ways is a good thing. It highlights what is possible and refines our collective thinking on what is acceptable in our society and what is not.

As a financial adviser my position has always been clear - I have a responsibility to my clients to advise them such that they pay all the tax they need to, but no more than that. There are often things that can be done to reduce a tax liability, but the question which increasingly arises is how far to go in improving your own situation at the expense of the wider public. So here's my tax avoidance scale - from mainstream to dodgy!

Mainstream

ISAs - savings or investment products which enable you to avoid paying most types of tax on whatever money is in there. They are specifically provided by the Government to help you avoid tax. Use the opportunity as much as possible!

Making extra pension payments - contributions to your pension receive tax relief (within limits). Again that is specifically there in legislation and is to encourage saving for retirement. Additional pension contributions when cash is available or using "salary sacrifice" - instead of investing elsewhere - could be classed as tax avoidance. But this, too, is mainstream stuff - make use of it wherever appropriate.

Common Approaches

Tax-efficient investing - If you have a sum of money to invest it makes sense to put it where you are going to pay less tax (investments being equal). That could mean offshore insurance bonds, Enterprise Investment Scheme-based investments, etc.. These approaches exist for other reasons as well as the tax advantages but even if tax avoidance is your main incentive they are well understood and fully accepted by the tax man, as is using your annual Capital Gains Tax allowance. Use where appropriate - although professional advice is strongly recommended.

Saving Inheritance Tax - this is a big one since values being taxed can be high. If your intention is to pass assets to your children, would you prefer to wait until your death and suffer 40% tax or to make a gift before you die and avoid it? Obviously you would choose to avoid it (although a gift is not always possible for various reasons.) Along with making use of various Inheritance Tax allowances and other approaches this is perfectly sensible financial planning and should be pursued (with professional advice).

Slightly Iffy

Sharing business income with a spouse. If you run your own business it is common practice to share income - salary and dividends - with your spouse to reduce tax. In some cases it's debatable whether the spouse does anything for that money, and that causes me some concern. But since it is so common the practice is not going to disappear overnight. Do it if your accountant so advises.

Offshore Companies - this is the "Panama Papers" issue. There are perfectly legitimate reasons to set up an offshore company not related to tax. Then again there are others which are all about avoiding tax. If an approach is completely legal I'm inclined to say that with full disclosure to appropriate tax authorities it is OK, and it is up to the tax authorities to make changes if the political will is to limit such approaches. On the other hand, I do have some sympathies with those who ask why you should avoid playing your part in society just because you have lots of money.

Business Property Relief - not everyone will agree with this, but... BPR is an Inheritance Tax relief intended to enable business owners to pass business assets on to family members on their death. However, products have grown up to take advantage of this relief by investing in a portfolio of small businesses. While this is fully accepted by HMRC it does feel like it stretches the point. Use with care.

Decidedly Dodgy

Quite a few schemes from the past have now gone away, partly due to the "General Anti-Avoidance Rule" which lets HMRC attack the schemes if they are there for tax avoidance purposes, even if they don't infringe the letter of the law. Those included schemes for avoiding Stamp Duty on expensive properties, for example, where the property was owned via an offshore company.

... and of course any approach that lies about income or hides assets should be completely out of the question.

18 January 2016

Long Term Care Uncertainty

We thought that things were getting clearer in sorting out who was responsible for paying for what when it comes to long term care in later life. Unfortunately, although the Care Act 2014 was passed and the first part was implemented in May 2014, the second, more significant, part has been deferred until 2020. In political terms that's almost like saying "never".

The second part included a care cap - limiting how much each person would need to pay before the state contributed, and an increase to the means-tested threshold from the current £23,250. Although neither aspect was quite as simple as the initial headlines indicated, it would certainly have provided some certainty when planning for later life.

In the meantime, one option is to take advantage of the extensions to Whole of Life insurance introduced by a handful of providers. As well as paying out on death, these will pay out if the policyholder suffers an illness which leaves them permanently incapable of looking after themselves. That money could be used towards care costs.

Products vary, but typically a proportion of the death benefit is paid out. In some cases an early payment means no later payment on death, while in others you still get some benefit on death as well (or your family does!).

Like all financial products these will not be suitable for everyone, but they may be appropriate to provide some certainty. We would recommend taking professional advice to research what is available and find out what is most appropriate for you.

Blog Archive