Claire Johnson considers the personal taxation options available to individuals in light of recent news.
It is estimated by the Revenue that tax avoidance costs the economy £4.5bn out of £7bn lost in total every year. At a time when many ordinary people and small business owners are feeling squeezed by the credit crunch this may seem like no laughing matter (even if you are a comedian).
The now well publicised K2 Tax Scheme in which comedian Jimmy Carr was participating involved individuals transferring their employment to a Jersey based company and being paid a modest salary topped up by loans which were not subject to income tax. Creative arrangements of this sort are by no means unique.
However, stringent disclosure rules introduced in 2004 oblige those promoting such tax avoidance schemes to register them with HM Revenue & Customs (HMRC) who will closely scrutinise and either challenge them if they do not stand up to scrutiny or bring in new legislation to close any ‘loophole’ which has made them possible. Treasury minister David Gauke has warned people using the K2 scheme that there are "serious doubts" about whether it would work and that they could still find themselves facing bills for more tax.
In our experience, most hardworking individuals and business owners have little or no appetite for high risk tax avoidance schemes and the prospect of protracted wrangling with HMRC in relation to their tax affairs. However, neither do they wish to pay more than their fair share of tax. That’s why we work closely with other professionals such as accountants and Independent Financial Advisers to ensure that individuals and business owners are able to adopt a joined up approach to arranging their business and personal affairs to make best use of exemptions and ‘reliefs’ provided for within the tax legislation.
Simple strategies can often be the most effective. For example, it is frequently the case that one spouse will have more income than the other. Significant savings may be achieved by the couple equalising their taxable income. This might involve switching savings into the name of the lower earner or entering into a simple declaration of trust in relation to a buy to let property owned by one spouse so that a proportion of the rental income may be taxed in the hands of the other. In the case of business owners it may involve spouses who are regularly ‘helping out’ in the business being formally employed and paid a salary which fairly reflects the work they are in fact doing.
Making better use of pensions as a savings or investment vehicle can also bring tax bills down significantly. In fact, a business owner’s Self Invested Pension Plan may even acquire and hold the business premises.
Many couples are unaware that it is usually possible for married couples to freely transfer ownership of assets such as shares or an investment property between them allowing them to make use of both annual exemptions to offset capital gains tax arising on a subsequent sale or gift of the assets.
For those concerned about Inheritance Tax, it is possible to reduce exposure simply and effectively over time via a strategy of lifetime gifts to make best use of the exemptions which are available. For example, many people are unaware that if they have surplus income each year and regularly give this to their children or other beneficiaries as part of their normal expenditure these gifts are free of Inheritance Tax regardless of whether the person making them survives seven years. It pays for individuals to have the benefit of expert advice. Many farm and business owners are unaware that valuable additional relief from Inheritance Tax attaching to a farm or business may be wasted if their Wills are not structured to claim rather than waste this relief.
There are even certain forms of investment such as Venture Capital Trusts which are pre-approved by HMRC as generating valuable tax breaks for participants. For those in later life investing in a portfolio of shares floated on the ‘Alternative Investment Market’ and which are classed as business assets it is possible to remove the value invested from the Inheritance Tax net after two years. Such arrangements are designed to encourage investment in smaller businesses which may present a more ‘risky’ investment proposition and individuals considering this route should have advice from a suitably qualified Independent Financial Adviser.
Tax rules are constantly changing and in light of the recent furore may seem more daunting than ever to negotiate. With the benefit of expert advice, individuals and particularly small business owners can enjoy peace of mind that they are paying the right amount of tax whilst making best use of the available exemptions and reliefs relevant in a way that is tailored to their particular circumstances and objectives.
For further information please call Claire Johnson on 029 20 385385.
Morgan Cole LLP is a limited liability partnership, registered in England and Wales with registered number OC352059. It is authorised and regulated by the Solicitors Regulation Authority. A list of its members' names is available for inspection at any of its offices and through this website.