The alliance of the Government authorities say that they are committed to fix the loose ends that permit the super-rich to avoid paying their taxes. The argument making rounds is that “tax avoidance” is morally incorrect. But while some of us are wealthy enough to give good reason for moving assets to an offshore tax sanctuary, employing a deluge of accountants or using complex trust arrangements; there are far better and simpler methods which are perfectly legal that can significantly contribute towards reducing our overflowing tax bills.
It has been notices by some critics that politicians are failing to distinguish between tax evasion and tax avoidance. Tax evasion entails breaking rules related to tax and is of course not legal. Tax avoidance comprises of adhering to the rules associated with tax, but planning your finances carefully in a way that you do not end up paying more tax than you have to. This can be very simple as you will be employing tax-efficient savings plans like ISAS, premium and pension bonds, or using lawful tax reliefs efficiently. It is also a general agreement that middle-class tax payers are perfectly entitled to use the expertise of accountants to reduce their tax bills.
In fact, it can be favourably argued that we as citizens and tax payers need to be more cautious and vigilant about such measures. This is because many families are feeling the strain on their monetary reserves due to a rise is the contributions towards National Insurance, ever-increasing inflation, the brand new 50p top tax rate, and add to that the fact that many also face additional tax demands, for which the HM Revenue and Custom’s computer errors are liable.
But, there is a way to tackle the tax situations by following the suggestions mentioned below to ensure that you keep your tax bills to the minimum:
- Tackle the tax situation as a family and not as an individual entity
We all are liable to pay tax on our individual income and assets. But, it is possible to reduce the sum total amount of tax payables by means of allowances and reliefs that married couples and civil partners can avail. All you need to do is arrange your finances appropriately. This works well and in your favour if only one partner pays a lower rate of tax than the other. Expert recommend switching revenue-generating assets such as, investment funds, shares, building and bank society accounts and co-owned property in the name of the partner who pays a lower rate of tax. In this way, you end up paying comparatively less tax on dividends, savings and rent interest. If you are not married and transferring assets, this could possibly trigger a capital gains tax (CGT) bill.
- Divide income tax payments among the family members
Each member of your family who is capable of working and earning has a personal allowance. So, if you earn in excess of the basic rate band for income tax, for instance if you own invoicing appointments, you could employ your partner. This way, a certain range of income would be tax free for your partner and an allowable expense to you.
You would have to contribute towards National Insurance but if they earn less than the lower limit, then no amount is payable at all. Though, no privilege is then being accrued to certain state benefits including the state pension. If you have children aged over sixteen for whom you are still financing, you could employ them as well in the business when it is their holiday and make them earn their keep. It will be beneficial for them and the wage is tax deductable to the business.
However, it is very important that you are sure to justify the extent of remuneration and that you can produce evidence if required by the HMRC. This will be to prove that you are actually paying your children for the work that they are doing for you. You will also need to consider the legislation pertaining to the National Minimum Wage although; some exceptions can be made for members of the family living at home.
- Making the most of ‘Joint Ownerships’
For assets that are likely to generate capital gains tax involving property and shares, it may be worth owning them jointly. Much will depend on the fact on how much yearly income they are likely to generate, when you will sell them off and also the size of the prospective gain. But, for instance if a buy-to-let home is owner under joint names, will enable you to use the CGT allowance of both the spouses. This way, you can realise capital gains amount of up to £20,200 before you pay tax, rather than just £10,100. Basic rate tax payers pay capital gains tax at 18pc instead of the standard 28 pc rate. But, couples need to be very cautious. When calculating capital gains tax, the gain earned is added to the revenue earned in that particular tax year. If the combination of this pushes you into a higher tax bracket then you will be liable to pay the 28pc rate on the gain. People who realise their assets by lumping them together are usually better off jointly owning the asset to reap the benefits of two capital gains tax allowances.
- Examine your tax code
The issues and problems with the HMRC’s computers have resulted to thousands of people paying wrong tax by means of their respective tax codes. Even though you are not amongst the six million tax payers who received a letter saying that tax has been over or underpaid, it is worth examining and your code. The older population should check if they are getting appropriate and higher personal allowances. Those who are older than 65 years of age, are liable to earn £9,490 before tax is charged, which is likely to rise to £9,640 for those who are 75 years of age and above. The standard personal allowance is £6,475.
- Pre-plan everything
There are a few not very known exemptions that will permit you to reduce inheritance tax bills incurring at a future date. Everyone has a yearly gift exemption worth £3,000 which eliminated this money from your estate irrespective of how long you live. Moreover, grandparents can contribute around £2,500 to each of their grandchild who gets married and likewise parents can give around £5,000. Tax payers, who are wealthy, can also make regular gifts out of their revenue which will also be IHT-free. These can be paid monthly, yearly or even on term basis, if for instance it was contributed towards payment of school fees. You can get a written letter from your relative stating that it is their intention to make this a regular gift from their income which is in excess. This will be the case only if they will be able to maintain their current standard of living as there is no limit on how much they can gift by this means. When taking into consideration the other gifts, people have to survive the transfer by a good seven years for it to be disregarded for the purpose of inheritance tax.
- Take into account tax-efficient investment
Tax breaks are provided not just by standard ISAS. Investors can possibly introduce a bigger dent in their tax bills by putting away their money in an enterprise investment scheme (EIS) or venture capital trust (VCT). Both these schemes are designed with the motive to attract and encourage private investment in smaller companies.
As a part of the EIS rules, tax payers can now put up to £500,000 in small companies. Purchasing shares in a qualifying company gives a direct reduction in tax of 20pc, so a £10,000 investment will translate into a reduction of £2,000 in an individual’s tax bill. Therefore, the maximum investment wipes £100,000 off your tax bill. The shares are free from inheritance tax and capital gains tax.
You can opt to invest in a broader range of shares through a VCT. This will earn you a tax reduction of 30pc of the amount that you have invested up to £200,000. A £10,000 would knock off £3,000 off your tax bill, the maximum investment which cuts down your tax by £60,000. Of course, these investments are very risky as they are not guaranteed to perform well and the resulting losses can outweigh any tax saved.
- Borrow in a way that it is tax-efficient
Tax relief can be claimed by anyone with a buy-to-let property on the mortgage interest. It is said that it will make sense to increase borrowing on a buy-to-let property and use this money to decrease the main amount of mortgage paid on your residential home where there is no scope for tax relief grants. This has to be meticulously done. A separate business bank account can be opened and rental money and expenses go in and out of this account. But, you can use any profits made on the rental property to reduce your own mortgage, which would be a tax-efficient way of arranging your borrowings. People can borrow money only up to the value of the property when they began letting it.
- Going offshore
More often than not, for those in Britain, there is little tax advantage in employing one of the popular offshore regions such as the Isle of Man, Channel Islands, Liechtenstein or Luxembourg. Taxpayers are required to declare their worldwide earnings which include interest paid on bank accounts held overseas. HMRC can now access information on these accounts thanks to the new data-sharing structure.
But, some offshore bonds may still be advantageous to higher rate tax payers as they allow people to postpone tax. These products often involve complexities for which you can seek independent advice.
- Give up a part of your salary
Certain non-taxable benefits can be availed by giving up a part of your salary. Such benefits include childcare vouchers and national insurance bill. Paying for childcare using childcare vouchers can help parents save £1000s a year in tax. These vouchers are made available by the government through a special scheme which is operated through employers. This amount is deducted from your pre-tax salary. Even though it may not sound big but the benefit you can avail on taxes can be immense. A parent can be paid up to £55 per week by their employer which amounts to a total of £886 a year.
- Stick to the basics
Maximising pension and LSA savings can prove to be extremely tax efficient but still many people fail to avail this benefit. In LSA a person can easily obtain a tax relief on £10,200 approximately half of this benefit can be availed in cash. Few experts believe that investing £20,400 a year can relieve a couple of paying taxes on income or growth. Assuming return on investment to be 6 pc per annum a person can obtain a tax-free profit of over £95,000 after duration of 10 years.
- Insure Yourself
One way to avoid tax is to not have any source of income. This is quite a drastic solution to the tax issue for many and they constantly seek to avoid for this to become a reality. For instance, self-employed people are very vulnerable to periods of unemployment and often do not get paid if they are not able to work through illness. The simple solution is to insure yourself along with any other key person that you employ who ensures the sustainability of the business. This is against the risk, the premiums that do not get tax relief grants but the payments are made tax free. Life cover is an essential product to have.
- Claiming allowances of all types
People who are self employed can claim for the additional costs involved in running a business from home. This consists of heating, lighting, property insurance, council tax, mortgage interest and even repairs. These costs can compensate against profits reducing your overall tax bill.
Thus, these techniques can be applied to legally reduce the tax bill. If you face any strain in paying your tax, you can opt for income tax loans to ease the burden of paying off your tax liabilities.