Following last week’s column on the fall of the stars with tax planning, I thought I would just expand on marketed tax avoidance schemes, as several readers were worried whether they were the wrong side of the law or not. So here are my thoughts on how to reduce your tax bill without the smoke and mirrors.
In 34 years of giving advice, we have seen many ‘fancy’ schemes put in front of society aimed at a ‘fandangled’ approach to mitigating tax.
The Revenue look at every scheme with a reasonably straight forward eye – what is the motivation behind the action. Mitigation is very different from avoidance.
Every sport, business and relationship will agree that being brilliant at the basics is more than enough. There is no need to be fancy with tax planning in the UK as the tax opportunities to mitigate tax are abundant. It is only through apathy, fear, or marketed avoidance schemes that the public are clobbered.
Of course, for many corporations, these rules just don’t seem to matter. Last year it was recorded that four of the top 10 tax havens in the world were British. It may come as a shock that the combined tax lost to offshore wealth across the UK and its three havens is a staggering £64.5bn per year, more than the NHS staff bill. Priorities appear wrong, but who am I to judge such a great gesture. Hey ho.
In 2004, the Finance Act introduced the disclosure of tax avoidance schemes (DOTAS). This introduced penalties across the board for non-early disclosure on both promoters and scheme users of schemes. It gave the Revenue early information on new schemes. It’s a great idea that avoided your family finding out, after you die, that the tax trust didn’t work. Bonus.
Coming back to the motivation above, consider the motivation of the ‘Icebreaker’ and ‘Ingenious’ avoidance schemes. These attempted to create artificial losses arising from different scenarios eg films like Life of Pi, Die Hard 4 and Avatar. As well as having to pay the unpaid tax, the ‘investors’ had to pay large legal bills as well as interest on the tax – Oh, and you have the Revenue’s further unwanted attention for being a bit of a ‘dancer’. In the above schemes, ‘investors’ tried to claim back more than they had invested. See note above re motivation!
The ‘eclipse 35’ avoidance scheme which claimed to invest in film rights was a tax avoidance scheme. This was a beauty, with people borrowing vast sums of money to invest, then claiming tax relief on the interest. The transactions into two Disney films were artificial of course and hey presto, it failed. See note above about motivation!
Most of these schemes are promoted by agents who receive payments from the schemes. In short, pay an adviser such as your solicitor, accountant, or Independent Financial adviser. According to the Revenue, the current ‘promoters’ of the schemes are rarely members of the correct bodies.
How to reduce your tax bill
The Revenue creates rules for tax. They are complicated to the ‘man on the street’ but not to an adviser. The solutions are many and are quite simple to use to mitigate taxes.
Trusts are used very frequently these days. Consider it just like a place that you trust such as a safe.
There are three roles involved: The person who sets up the trust who is called a settlor; the trustees who ensure the trust is managed appropriately, of which the settlor can be one; and the beneficiaries – clue is in the name of course, but they can have many varied benefits.
You can mitigate against income; Capital Gains and Inheritance Tax and the key reasons (motivation) are to either: maintain control; avoid delays in probate on death; protect assets for a beneficiary – e.g. a beneficiary getting divorced/going bankrupt; or save Inheritance tax.
While they sound fancy, they aren’t, but trusts like a life interest will trust, discretionary trust, discounted gift trust, loan trusts, interest in possession trusts or absolute and bare trusts, are pretty much run of the mill for a qualified adviser.
An independent financial adviser will not only choose the most competitive trust from a cost point of view, but they will also know, and have access to the very best funds to invest into.
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