Tax is a subject close to the hearts of most individuals, and business owners. 3 terms frequently used in conversations around tax savings are tax avoidance, tax evasion and tax efficiency.
James Turner, Director at York-based Turner Little, tells us that these are themes that run through most conversations with clients, old and new, and it is his job to ensure that clients are correctly advised on the legal stand point of tax efficiency, and tax avoidance, to ensure that no client unwittingly falls into the trap of tax evasion.
“Tax efficiency, explains James, is what the majority of people are trying to achieve. It is understanding the best ways to legally make the most of your personal or business income that is the key to success. There are a number of ways to make sure your income is as tax efficient as possible, and as a result ensuring that you maximise your income. Our job, when advising people in relation to tax matters, is not only to provide guidance that is consistent with the letter of the law, but also to ensure our clients comply with the spirit of the law.
“Tax avoidance, is where an individual or company, utilises tax systems to legally minimise their tax liabilities, for example, contributing to a pension scheme or incorporating and trading from a tax-efficient jurisdiction. When structures are set up correctly, these ensure the person or company pays as little tax as possible whilst staying within the letter, and spirit, of the law.
“Tax evasion on the other hand is where a person, or company intentionally sets out to not pay tax, either business or personal and they do so through lying, hiding and cheating the system. Turner Little are often approached by people looking to find a way to do this, and we always tell these clients that we cannot do business with them.
In terms of UK tax efficiency for the lay person, there are a number of vehicles available, set up by Government, that can be utilised to make your income more tax-efficient. These include using pensions, ISAs, checking you are on the correct tax code, and using HMRCs Marriage Allowance to transfer some of your earnings to a lower rate tax paying husband or wife. By taking advantage of the numerous government allowances each year, you can bring your tax liabilities down. For businesses, investments around Venture Capital Trusts, and Enterprise Investment Schemes could also maximise your bottom line.
ISAs are the most widely recognised investment method, set up by the government to specifically encourage savings and investments by offering generous and accessible tax breaks. You can invest up to £20,000 each year, without paying tax, and any capital invested into an ISA is allowed to grow in a tax-free environment. This means, that any income derived will also be exempt from taxes
With pensions, money is exempt from tax on the way in, exempted when it is invested and only taxed on the way out. Pension contributions are tax-free up to your annual allowance, and, like ISAs, are also allowed to grow in a tax-free environment. Once you have paid into a pension scheme, the amount can be further invested into assets, which provide an income or growth without the need to pay tax.
Venture Capital Fund Investment
Investment in a Venture Capital Investment Fund is an excellent way to reduce either personal, or company profits. 30% of the capital amount investment can be claimed back via personal tax reductions. Investors can inject up to £200,000.00 into the Fund, in order to claim the maximum tax savings. Shares in the venture capital fund must be kept for 5 years otherwise the tax relief will have to be paid back. Investing in a Venture Capital Fund will also afford savings on Capital Gains Tax on profits from selling your VCT shares. Dividends from the fund are also received tax free.
There are also other ways that individuals and businesses can legally reduce their tax liability.
Using a Trust or Foundation
A useful vehicle in long term asset management, and succession planning is creation and utilisation of a Trust or Foundation. Gifts of assets into Trust or Foundations, including property, money and pension funds, remove them from your estate, meaning that in the event of death, not only do you have full control over who receives the asset, but the recipient also will not be required to pay inheritance tax. As the asset is no longer your own, it belongs to the Trustees, should you need later life residential care, the value of the asset will not be eroded. The timing of gifts into Trust is crucial as such gifts can still form a part of your estate should you die with seven years of making the gift.
Foundations work in a similar way, in terms of the inheritance tax savings. Foundations are interested in controlling your assets for a specific group of people or purpose, of your choosing, rather than individuals, as is usually the case with the trust.
Trusts and foundations are very specialised areas. Obtaining specialised advice when implementing Trust and Foundations is essential to ensure that the structure implemented meets your specific needs.
Offshore Company Formation
The world today is a very small place, and many businesses trade globally, thanks to the ubiquity created by the internet. Businesses can therefore place themselves in the most tax efficient jurisdiction to suit the needs of the business owner, and their clients.
It is important to note that tax rules constantly change, and efficiencies depend on individual circumstances. For more information, please visit www.turnerlittle.com
Turner Little do not provide tax, legal or accounting advice. We would always advise that you seek advice from an independent financial adviser.
Turner Little specialises in creating bespoke solutions for individuals and businesses of all sizes. The knowledge and expertise of their specialists ensures that you will receive the best advice for your situation, no matter how complex.