Q: With all the press coverage surrounding tax avoidance and evasion, I am becoming confused as to whether it is acceptable to undertake any tax planning at all.
Should I even try to find ways of reducing how much tax I pay or is it now too risky?
A: Tax has been in the headlines over the past 12 months more than I can remember over the past 12 years. This is partly an inevitable result of the requirement to reduce government borrowing, partly down to aggressive tax planning arrangements that have become prevalent in recent years, and partly due to a concerted campaign by HM Revenue & Customs (HMRC) to push morality as a basis for paying tax and not indulging in tax planning which amounts to tax avoidance albeit is still legal.
This is a risky approach by HMRC which will undoubtedly have stopped some taxpayers in their tracks. However, the heightened awareness of certain schemes may have attracted others.
Underlying this should be a tax system robust enough to implement the wishes of Parliament, supported by a government with the political will to introduce tax legislation to thwart what is perceived as tax avoidance.
Unfortunately however, the 12,000 pages of legislation, significant HMRC guidance and countless tax cases have taken us into very muddy waters indeed. I therefore have much sympathy with your question. However, the good news is there remains significant scope for tax planning which is effective, legal and passes moral judgment.
Your tax adviser will be able to concentrate on what is specifically suited to yourself, but I have included comment on just two examples of arrangements that show tax planning to be in good health.
Firstly, you could consider investing in a Seed Enterprise Investment Scheme (SEIS). The tax attractions here are a potential initial recovery of 50 per cent of your investment, mitigation of an existing capital gain possibly saving 28 per cent, and should the investment be lost entirely a further tax offset of 22.5 per cent.
Any mathematicians reading this will notice that even in this last worst-case scenario there is still the possibility to have hedged 100.5 per cent of the investment against tax relief. Of course, should the investment increase in value the gain will be exempt from tax, assuming certain qualifying conditions are met throughout a three-year period. In conjunction with a tax adviser, advice should be sought from a financial planner who will be able to comment on specific investments.
My second example relates to charitable legacies in a will, a very common wish. This is tax- efficient as far as inheritance tax (IHT) is concerned, but misses out on potential income tax relief, primarily in the form of Gift Aid.
There are planning opportunities here which can be undertaken with relatively simple amendments to wills. This can increase the value of the legacy by 25 per cent in the hands of the charity and also allow for a trusted friend or family member to receive tax relief at a rate of potentially just over 30 per cent of the amount of the intended legacy.
Tax planning has recently been tainted by some unpleasant headlines, but with the system as complex as it is robust advice is still required to avoid unnecessary liabilities.
• Neil Mitchell is a partner at Mazars
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