In the current climate of headline news relating to tax avoidance, many members of the public are questioning whether they may fall foul of the law by taking any steps at all to reduce the tax which they pay. In a written question to Her Majesty’s Government last month, Lord Ashcroft asked what the Government considers to be the difference between tax avoidance and aggressive tax avoidance.
In the written reply for the Government made by Lord Deighton on 25 February 2015, the distinction between tax avoidance and aggressive tax avoidance was ignored but it was confirmed that HMRC distinguishes between tax avoidance and tax planning. To quote from the reply:
“Tax avoidance is bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce a tax advantage. It involves operating within the letter – but not the spirit – of the law. Tax avoidance is not the same as tax planning. Tax planning involves using tax reliefs for the purpose for which they were intended. For example, claiming tax relief on capital investment, saving in a tax-exempt ISA or saving for retirement by making contributions to a pension scheme are all legitimate forms of tax planning. While such actions may reduce the total amount of tax paid, they are not tax avoidance, because they involve using tax reliefs in the way that Parliament intended when it passed the relevant legislation.”
As a private client lawyer, this provides comfort when advising clients in relation to Inheritance Tax (IHT) planning. The message must be: ensure that you use the available exemptions in relation to gifting in your lifetime and on death, to reduce the value of your estate for IHT purposes. Capital gifts of £3000 a year are exempt from IHT; small capital gifts of £250 a year to any individual are exempt and regular gifts from surplus income are exempt. When making your Will remember to make use of spouse exemption and charitable gift exemption. The latter can be used to reduce the applicable rate of IHT from 40% to 36%, if 10% of your estate passes to charities. Don’t forget the 100% exemption to IHT which may apply to your trading company shares and to agricultural property – these exemptions can provide valuable tax planning for future generations of your family.
All of the above mentioned exemptions are available under current legislation and, reassuringly, their use constitutes legitimate tax planning and not, tax avoidance.