Tax evasion has always been illegal and is a criminal offence that can be punishable with a custodial sentence.
Last week’s television documentary with pop star Gary Barlow sparked off another online debate on Mumsnet about the ethics of what is known as “tax avoidance”. According to Wikipedia, tax avoidance is “the legal usage of the tax regime to one’s own advantage, to reduce the amount of tax that is payable by means that are within the law”.
The recent highlighting of tax avoidance schemes used by celebrities has sparked a public backlash, even though many schemes at the time were within the letter, if not the spirit of the law.
The Government has rallied around this public backlash with the recent introduction of new anti-abuse legislation known as “GAAR”. This legislation will require any potential tax avoidance schemes to be pre-approved by HMRC in order for them to be successful.
The legislation should ensure that any schemes which turn out to be a series of otherwise artificial transactions will fail and tax will be due.
Does this therefore mean that it is no longer possible to try and reduce your tax bill? Not at all! “Tax Planning” is still considered to be fine both legally in the eyes of HMRC and ethically.
So what is tax planning? It is a central part of how a financial planner constructs a financial plan for their clients. It is taking full advantage of the various tax allowances that HMRC have put in place. Where tax evasion involves lying, and tax avoidance involves using a complex series of transactions, tax planning is open and often quite straightforward.
Examples of tax planning include making use of income or capital gains tax allowances each year, funding ISAs and making full use of the very generous pension allowances and inheritance tax allowances.
Reducing inheritance tax by careful tax planning is becoming more necessary, with the nil-rate band frozen at £325,000 until at least 2018.
The pension changes proposed in the last Budget will open up a huge market for tax planning services as the public seek to take advantage what look to be incredibly generous planning opportunities.
David Hill is a Chartered Financial Planner and Independent Financial Adviser at Hills Financial Planning, 15 Agnew Street, Larne. He can be contacted on 028 28276814 or by email: email@example.com