We are all aware of, and have a view on, the legitimacy of some well-known multinational companies structuring their businesses in such a way as to avoid or minimise the tax they pay. Views are both politically and economically divided when it comes to the treatment of these multinationals. But what is the position with individuals who wish to minimise the impact of tax on their assets?
What do we mean by tax planning, tax avoidance and tax evasion?
It is important to clarify the terminology used when referring to the legalities of taxation.
- Tax planning is the legal process of arranging your financial affairs to maximise tax efficiency. Examples include saving for retirement or using tax allowances.
- In contrast to tax evasion, tax avoidance complies with the law. The practice refers to taking advantage of legal ‘loopholes’ to reduce tax exposure, while complying with the letter of the law. It is sometimes termed ‘aggressive’ tax planning.
- Tax evasion is an illegal activity in which a person or entity deliberately avoids paying a tax liability.
Inheritance tax and dementia tax
Inheritance tax is often the first tax to spring to mind, and opinions regarding this are generally polarised. Some hold the view that inheritance tax is a form of double taxation, taxing income that has already been subject to tax. Others believe wealthier individuals should pay their ‘fair share’ or that they have a greater ability to successfully mitigate or avoid tax. We have also heard the slogan, widely adopted recently, about equality of opportunity; some see a progressive inheritance tax system as essential in preventing privilege being automatically transferred from one generation to the next.
The headline grabbing cases in the media about the singer Gary Barlow and comedian Jimmy Carr brought the issue of aggressive tax planning for individuals to the fore, raising awareness of tax planning schemes that had been available to the wealthy. It was not, however, a watershed moment that changed the view of the wealthy; that tax planning was no longer part of their succession planning. In fact, soaring house prices with no relative increase in inheritance tax allowances have led to more people being affected by this tax. Inheritance tax, which is payable in most circumstances on estates valued at or above the £325,000 threshold, and the question of appropriate tax planning are more relevant than ever. The threshold has not increased since 2019, though house prices in many areas have risen significantly since then. This has had the effect of now catching many more individuals and families, who wouldn’t be regarded as particularly wealthy, in the tax net. HMRC raised £5.9 billion during 2021 from this tax on individuals.
A similar debate arises in respect of paying for care home fees, which may become a consideration for many of us in later life. Many clients are keen to do what they can to avoid their hard-earned wealth being denuded because of care fees, which they strongly believe should be fully funded by the government, while others have a robust financial plan in place to cope with them paying for private care, if required.
Shifting attitudes to tax avoidance
The introduction of the General Anti-Avoidance Rule (GAAR) was designed to provide some clarity around what constitutes tax avoidance, what is acceptable and what is not. The premise underlying the GAAR is that levying tax is the principal mechanism by which the state funds the services and facilities it provides for its citizens, and that all taxpayers should pay their fair share. The legislation focuses on what constitutes ‘reasonable behaviour’. This is a highly subjective concept to define.
It demonstrates the challenge of determining whether a line has been breached and whether any tax planning is avoidance or evasion. The line is not black and white but a spectrum; one can perhaps identify that some planning at the far end of the spectrum is evasion, but further along the spectrum it can be much more difficult to determine. The GAAR rejected the former approach taken by the courts in a number of historic cases to the effect that taxpayers are free to use their ingenuity to reduce their tax bills by any lawful means, however contrived those means might be and however far the tax consequences might differ from their real financial position. Those aggressive tax planning schemes that were offered to high net worth individuals, including celebrities who found themselves in the media spotlight, are no longer on the market.
Minimising tax is often not a primary focus
As a trusted adviser to individuals and families, my role is to support clients with their succession aims, and I spend a good deal of my time discussing clients’ finances, often in conjunction with their financial advisers and accountants. However, in advising these clients, I do not look purely at the financial landscape; each family has its own individual needs and dynamics, and minimising tax is not always the primary driver for a client needing advice.
My focus is to advise on solutions arising not simply in terms of tax but in meeting the family’s needs. For instance, this could take the form of setting up a protective trust for a vulnerable beneficiary, or identifying a solution to treat all the client’s children fairly in the distribution of assets, where, for instance, one child has been more involved in the family business than their siblings. These are complex issues and although one has to consider the legal and tax position, the main thrust of such advice is always to meet the family’s individual aims.
Complying with the tax rules is essential but the motivations behind tax planning are individual matters for my clients.
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