TAX avoidance schemes are a relatively hot topic at the moment and HM Revenue & Customs have produced guidance on what they mean by tax avoidance.
They state: “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.”
They make it clear that tax avoidance is not the same at tax planning, which involves using tax reliefs for the purpose for which they were intended.
For example, claiming tax relief on capital investments, saving in a tax exempt ISA or claiming tax relief on pension contributions are all legitimate forms of tax planning.
While such actions may reduce the total amount of tax paid, they are certainly not tax avoidance because they involve using tax reliefs in the way that Parliament intended when it passed the relevant legislation.
Higher rate taxpayers naturally have the most to gain from tax planning. However, the Government has significantly reduced the availability of tax relief for pension contributions and the amount one can shelter from tax within ISAs is also limited.
So, what other steps can higher rate taxpayers take?
Offshore investment bonds should be a key consideration for higher rate taxpayers as an investment portfolio which is held within an offshore bond will not be subject to either Capital Gains Tax or Income Tax, which in turn equates to an uplift of up to 66% on investment income for higher rate taxpayers.
An investment portfolio within the bond can also be managed on a bespoke, discretionary basis so one would not be tied to what could be a limited range of funds available through the provider of the offshore bond.
One is also able to take regular monthly withdrawals from the Bond of up to 5% per annum of the initial amount invested without any tax implications until the full value of the initial investment has been returned.
This type of planning allows one to benefit from tax efficient investment returns for a significant period of time.
Costs for Offshore Bonds have also fallen significantly over recent years so, for higher rate taxpayers who are maximising pension contributions and ISA allowances, serious thought should be given to holding a portfolio of investments in this way.
Tax legislation is, of course, subject to change, so professional advice should always be taken in the first instance.