Millions feel a visceral recoil at the tax-minimising schemes of the rich and famous. We ponder our own dread of a £100 fine for late payment and blaze in anger over revelations that HSBC has helped wealthy clients evade tax to the tune of hundreds of millions of pounds.
It is wrong, grossly unfair and we demand action. But what precisely?
We accept there is a difference between tax avoidance – which is legal – and tax evasion, which is not. But the distinction has long been blurred. The brilliant late economist Ralph Harris coined the phrase “tax avoision”, which well captures the ambiguity at the heart of today’s row.
Millions take advantage of savings schemes such as ISAs and pensions that are tax-sheltered and approved. Tens of thousands of businesses make full use of capital allowances and investment scheme reliefs – government-encouraged “loopholes”.
This is not – hopefully – what this row is about. Does it not centre on schemes specifically designed to avoid tax, typically through the use of loans and offshore investment accounts?
Many households in the UK have entered into inheritance tax planning schemes. These are legal but not all may be deemed acceptable.
Here we enter the Fifty Shades of Grey of “tax avoision”. Take, for example, a deed of variance that could be used to protect the beneficiaries of an estate from a range of potential risks including divorce settlements, long-term care fees and further taxation.
A deed of variation can ensure the estate passes on in the most inheritance tax-efficient way. If the assets are passed to an individual who may have an inheritance tax problem themselves, they could elect to have the assets passed instead to their children or grandchildren, thereby reducing their estate. An individual who has foregone the legacy is not deemed to have made the gift but instead it is the deceased who is deemed to have made the transfer. By transferring ownership of the asset from one beneficiary to several, more capital exemptions can be used and any gain made on sale absorbed by the exemptions so that there is no capital gains tax to pay.
Tax “dodging”, or acceptable tax mitigation? This is a perfectly legal tax avoidance device, as invoked by the Miliband family.
Other schemes are seen as entering a darker shade of grey. Mention “offshore bonds” and it is assumed you have millions stashed behind a brass plaque in Zurich or Grand Cayman. Are these not tax avoision devices of the most aggressive kind?
But they are perfectly legitimate, provided by household name insurance companies and used by tens of thousands of UK investors. Legal & General, for example, provides an international portfolio bond that can be advantageous to those who have used up their maximum entitlements to other tax-favoured options and are concerned about estate planning, education costs, property purchase or inheritance tax planning.
An offshore bond can be placed in trust on behalf of another person, such as a partner or a child. You can take out up to 5 per cent of your original investment in the first year you invest and in each of the following 19 years, up to 100 per cent of your investment or until you decide to cash in your bond. This can be done without an immediate income tax liability.
Alternatively, you can carry forward the balance for use in the next or subsequent policy years, until you have withdrawn all of the original investment. An immediate tax charge only occurs if you take out more than your cumulative allowance.
This can provide a tax-efficient income for you or your family and provided that you stay within the limit, you do not have to declare this income on your yearly tax return.
Offshore bonds of this type require high minimum investment, typically between £50,000 and £200,000. But they can make a flexible, tax-efficient supplement to a pension and can provide continuing tax efficiency if you are likely to remain a higher rate or additional rate taxpayer in retirement.
Legitimate tax avoidance has become scorched in the heat of recent days. The HSBC revelations are shocking. Legislative change is needed – and backed up with sanctions that bite.
But better, surely, that politicians focus on the loopholes that need closing rather than resort to rhetoric that tars legitimate tax planning arrangements with the “tax avoision” brush.
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