Tax avoidance - legitimate planning areas

Tax avoidance - legitimate planning areas

The UK faces greater uncertainty following the outcome of the snap election that is not just limited to negotiations with the European Union.  Government spending patterns will no doubt change as the minority Government increases spending to keep voters and MPs of all parties on their side.  Tax avoidance will remain a key area for the Chancellor to raise money over this parliament to fund any increase in expenditure.  The UK already has one of the lowest gaps between anticipated tax levies and those received, but the squeeze is set to continue. 

The intermingling of terminology covering legitimate tax avoidance (read mitigation) and evasion by HMRC and the Chancellor simply highlights the need to take extra care when considering any form of planning that seeks to reduce tax liabilities.  So what legitimate tax mitigation measures will not see investors facing fines or penalties in future?

Pensions, Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) are all written under statute law that provides investors with a high level of certainty that the available tax reliefs will not be challenged.  This is at odds with any planning that uses partnership structures or interpretation of legislation backed up by legal opinions, which in the current climate are likely to attract challenge and costly tax investigations.

From these three, pensions should be seen as investors’ first port of call.  Pensions allow investors to choose a suitable level of risk as there is freedom to select a wide range of asset classes including, fixed interest, commercial property and equities. 

In contrast VCTs and EISs are, by their very nature, high risk as they involve investment in small unquoted or AIM listed companies.  To compensate for the high risk nature of these investments, there are attractive reliefs.  For the right investor the combination of these reliefs may provide ample compensation for the high level of associated risk.

The EIS can be particularly effective in mitigating tax liabilities as it enables individuals to combine a series of reliefs.  The available income tax reduction (30%), capital gains tax deferral (up to 28%) and exemption from inheritance tax (40%) offers some investors an effective 98% relief on the amount invested. 

From a capital gains tax perspective there is also an arbitrage opportunity for EIS investors.  Capital gains tax on most assets reduced from 28% to 20% from 6 April 2016.  EIS allow investors to defer gains made in the prior three years, which then crystallise when the investment ends.  In effect, gains subject to 28% in previous years that are deferred may then be subject to 20% when they crystallise. The 8% differential would then become an absolute saving rather than a deferral. 

Tax avoidance may be unpopular with the Chancellor.  That should not stop individuals structuring their affairs in the most tax efficient manner using legitimate planning.

If you haven’t done so already, we recommend speaking to your adviser and seeking their views.

Phil Cook
Private Client Partner 

Article first featured in:

Professional Adviser (17th July 2017)

Clients are advised that the value of investments can go up as well as down.

Tax led investments can be higher risk, longer-term investments that may be difficult to sell within a reasonable timeframe and at ‘fair value’ and so will not be suitable for everyone; They should only be considered once other planning opportunities have been fully explored. The tax reliefs available to EIS and VCT investors are dependent on the companies in which you invest maintaining their qualifying status. Tax treatment depends on your individual circumstances and may be subject to change in the future.

Thomas Miller Investment is the trading name of the businesses in the Thomas Miller Investment Group. This note has been issued by Thomas Miller Wealth Management Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155) and is a company registered in England, number 08284862.

Please get in touch if you have any questions, our team would be happy to help.

The value of your investment can go down as well as up, and you can get back less than you originally invested. Past performance or any yields quoted should not be considered reliable indicators of future returns. Prevailing tax rates and relief are dependent on individual circumstances and are subject to change.

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