Tax planning is a real hornet’s nest, at least it can be if you want to push the envelope. And why would you want to do that?
Each and every adult in the UK starts each and every tax year with something like £400,000 of magnificently tax advantaged investment allowances. That’s spread across pensions, ISA, VCT and EIS. Plus a further c£8,000 per child.
How generous is that?
With ‘tax avoidance’, ‘tax evasion’ and ‘tax planning’ often used somewhat interchangeably as negative terms by the tabloid press, it’s worth refreshing your knowledge of what each of these terms actually means, and their legality.
Tax evasion involves the deliberate failure to declare and account for the taxes owed by a business or person, and it is always illegal.
Tax avoidance, meanwhile, is operating within the law whilst finding ways to bend tax rules to your favour. Artificial transactions are often created with their only purpose being to manufacture a tax advantage.
It’s worth noting that tax avoidance schemes don’t actually work in most cases, with HMRC regularly successfully challenging those who attempt them and often collecting more tax than the subject was hoping to save.
Tax planning, however, involves using tax reliefs for their intended purpose such as by making payments into pension schemes or by claiming relief on capital investment.
Their usage can sometimes be considered aggressive or excessive, especially if they are used beyond their legal intention or by someone for whom the benefits were not intended.
In cases such as these, taking action against tax planning is the right thing to do to ensure the tax system remains fair and appears as such.
Another key issue which has come under scrutiny once again since the release of the Paradise Papers is the holding of offshore bonds.
Anyone holding such bonds might be feeling concerned after seeing the criticism levelled at a number of famous faces in the media, but should be reassured that they are a product which is well-established in the UK market and regulated by the Financial Conduct Authority (FCA).
HMRC outlines the taxation of offshore bonds in its tax manuals.
When a bondholder takes proceeds out of their bond, they may incur a taxable gain. Chargeable Gains Certificates must be issued to investors by bond providers, with HMRC also receiving certificates in a number of other cases such as higher value investments.
This means that UK tax is collected on ad hoc partial withdrawals as well as maturity/surrender payments.
The important thing to remember is that, whilst insurance bonds may have been presented as tax avoidance in the public eye, they are in fact a well-established tax-efficient investment opportunity which is fully scrutinised by HMRC.
Reputable providers also carry out thorough internal audits to ensure compliance by its businesses.
If you have any questions around any of the topics discussed here, please feel free to get in touch with us directly.