In recent years politicians of all persuasions have sought to blur the distinction between tax evasion and tax avoidance by introducing the concept of morality, which is nonsense. In essence, evading tax by not properly declaring income, capital or relevant transactions is not paying the tax that is owed. Tax evasion is therefore illegal and it is appropriate that individuals (or other legal entities) are punished when they evade tax.
Tax avoidance is the structuring of one’s financial affairs to take advantage of legitimate tax breaks and thereby legally reduce the tax due. It is not illegal to avoid tax.
Paying tax that is due is a question of legality rather than morality. There are of course loopholes that are widely exploited (particularly those relating to the taxation of international corporations that trade in the UK) but it is the job of government to deal with this by closing such loopholes.
Politicians crow about the tax breaks they bestow and bleat about the resulting impact on tax revenue when taxpayers take advantage of them. My message is that you should not let political rhetoric curtail your ambition to pay no more tax than you should because the likelihood is that the tax burden will be rising after the forthcoming election, whatever shape the new government might take.
Here are some of the main opportunities I believe you should consider to improve tax efficiency before the tax year end.
Income Tax Planning
Personal income over £150,000 is taxed at 45%. However, for income between £100,001 and £120,000 the effective tax rate is 60%. This is because the personal allowance is reduced by £1 for every £2 of income over £100,000.
It is sensible to avoid such a punitive tax rate where possible. One off events, such as the surrender of a non-qualifying life policy (an investment bond, for example), have the potential to catch out the unwary by triggering a tax charge at these high rates. There are a number of legitimate strategies to avoid this.
In general, if your income is high, it is more efficient to invest for capital gains rather than for income. Capital gains are currently taxed at a maximum rate of 28%, which is substantially less than the top rate of income tax.
To create an immediate reduction in your income tax liability, consider pension contributions (for those aged under 75) which currently enjoy tax relief at the highest marginal rate of tax. There is pressure to curtail tax relief for high earners so it might be a good idea to look at this sooner rather than later. Investment in venture capital trusts and enterprise investment schemes will attract income tax relief at 30%, although you would need to be able to afford the consequent risk to capital.
Finally, it should be remembered that Gift Aid donations will attract income tax relief and it will be possible to make such donations up to 30 January 2016 and elect for the donation to be treated as made in 2014/15.
Capital Gains Tax Planning
Everyone can realise capital gains up to the £11,000 annual exemption without any tax to pay. If you have capital gains it does make sense to use as much of your exemption as possible because any unused exemption cannot be carried forward. It should be remembered that married couples and civil partners are able to transfer the ownership of assets to each other without tax assessment, provided that there are no conditions relating to the transfer. This can facilitate the use of two exemptions and potentially a reduction in the applicable tax rate (from 28% to 18%) on at least some of the gain.
Investment Planning
The contribution allowance for ISAs is £15,000 for adults and £4,000 for children (Junior ISA). Freedom from income tax and capital gains tax acts to accelerate the rate of accrual of such savings over time. For married couples and civil partners, the theoretical longevity of ISA investments is extended by the recently introduced allowance enabling the ISA tax benefit to be passed to the surviving partner in the event of death.
Inheritance Tax Planning
It is possible to gift up to £3,000 in the current fiscal year with immediate relief from inheritance tax. It is possible to carry forward this exemption for a complete tax year, which might mean that you could gift £6,000 before 6 April 2015.
Furthermore, there is an exemption of £250 for small gifts to as many individuals as you like and exemptions for gifts on marriage of £5,000 from each parent and £2,500 from each grandparent.
There are many other inheritance tax planning strategies to consider but these are not tax year sensitive.
To conclude, there are plenty of opportunities to improve tax efficiency. To explore these opportunities further, please Contact Us.