Tax Planning

For many years, tax planning in the UK was largely governed by the following principle, which was established in 1929 by Lord President Clyde in Ayrshire Pullman Motor Services v Commissioners of Inland Revenue:

‘No man in this country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Revenue.’

Ramsay changed this principle by denying tax effectiveness to arrangements where:

  1. there is a series of transactions and,
  2. they are pre-ordained and,
  3. there are steps inserted that have no commercial purpose apart from tax avoidance.

The Ramsay principle is a potent and effective weapon often ‘wheeled out’ by HMRC when dealing with complex tax avoidance arrangements.

The politicians have changed their use of language by using ‘tax avoidance’ and ‘tax evasion’ in the same sentence; and have attempted to change the meaning of the words. Put simply, tax avoidance is legal and tax evasion is illegal. However, politicians are seeking to blur the lines between the two in an attempt to make people feel that it is in some way immoral to organise your affairs in such a way that you or your business pays only the amount of tax that the law requires you to pay.

As Chartered Financial Planners, it is incumbent upon us to consider the impact of taxation in all of the advice that we provide to clients.

Let us consider one area in particular, which is inheritance tax planning (IHT) and inheritance tax advice.

I have heard it said that inheritance tax is a taxation of choice – in fact it might well have been a politician that originally said it. Whilst that might seem an outlandish statement, it is in fact largely true because if, for example, you were willing to gift all of your worldwide assets as a potentially exempt transfer (PET) 7 years before you die, under current legislation, there would be no inheritance tax payable either during your lifetime or upon your death.

The difficulty with this approach, of course, is that you may wish to retain control or use of the assets whilst you are alive; and also, you don’t know when you are going to die!

Consequently, the wise person seeks inheritance tax advice from a Chartered Financial Planner that provides an inheritance tax planning service. The planner has to really understand to what extent you wish to retain control of your assets, how you want to use them and how you want your estate dealt with upon death. It’s a balancing act between giving assets away during your lifetime and retaining control. Trusts play a large part in the inheritance tax planning process and should be considered in any inheritance tax advice.

Let’s take another straightforward example of tax planning – Directors pensions.

The directors of Limited Companies and PLCs will first and foremost seek to establish some form of directors’ pension scheme to provide for the retirement needs of the individual directors. However, the savvy company director is very aware of the corporation tax planning opportunities that directors’ pensions provide.

Whilst there are a number of fairly sophisticated ways in which directors’ pensions may be used to mitigate corporation tax, income tax and national insurance contributions, there are some very simple and straight-forward opportunities with directors’ pensions.

For instance, a contribution made by a company into a director’s pension usually attracts corporation tax relief for the Company. The director pays no income tax or national insurance on the contribution being made into his or her director’s pension fund.

Directors’ pension schemes such as SSAS can also offer loan-back facilities to the company. In other words, the company can make a contribution into a director’s pension, claim the corporation tax deduction, and may then borrow back some or all of the contribution to use for business purposes.

There are a number of more sophisticated, and sometime quite aggressive, ways in which individuals and business may manage their tax liabilities. However, hopefully, I have provided a flavour of some of the ways in which people are able to mitigate (avoid) tax.