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Witch hunt: Industry warning as tax furore risks damaging financial planning

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A public furore over the tax affairs of the UK’s senior politicians has become a “witch-hunt”, with one MP warning it will turn savers away from the tax planning they should be encouraged to do.

Following cross-border efforts coordinated by the International Consortium of Investigative Journalists, the publication of the Panama Papers sparked widespread anger at the participation of international leaders in offshore tax havens.

Most damningly, the Prime Minister of Iceland was revealed to have held bonds of three major Icelandic banks, even as he was involved in negotiations about the banks’ future following their collapse in 2008.

In the UK, the focus has centred on Prime Minister David Cameron, and his investments in the offshore Blairmore fund run by his late father.

But with Cameron’s tax affairs now publicly declared, and experts describing the arrangements as legitimate, is the scandal getting out of hand?

Full-frontal

Downing Street officials issued a summary of Cameron’s tax affairs on Sunday, showing that the Prime Minister has paid upwards of 33 per cent of his total earnings in income tax every year  since coming to power in 2010. This was supplemented by the further revelation that Cameron was gifted £200,000 by his mother in the months after his father’s death in late 2010.

Under current rules, this sum is exempt from inheritance tax if Cameron’s mother lives seven years beyond the date of the gift.

Old Mutual Wealth financial planning expert Rachael Griffin explains: “Potentially exempt transfers are a legitimate financial planning tool.

“We are at a point where the needle has swung so that the most innocent rearranging of your assets is considered indecent”

“They enable people to pass on money they have saved and accumulated over the years to their children and grandchildren, helping with school and university fees, and getting on the property ladder.

“PETs have become more important with the rise in property prices and the fact the family home may now use up most of someone’s nil-rate band.

“They are not a tax avoidance vehicle for someone to use on their death-bed as they are only exempt from the donor’s estate if they survive seven years from making the gift. If they don’t then there could be inheritance tax to pay on the gift. Once seven years has passed, they will be included within the beneficiary’s estate for IHT purposes.”

Nonetheless, newspapers described the move as a tax “dodge”, and Labour suggested IHT is ripe for review.

Speaking on Sunday about Cameron’s £200,000 gift on BBC’s Andrew Marr show, Jeremy Corbyn said: “That is within the rules, providing of course the person giving the money lives for more than seven years and obviously we hope she does.

“The issue is it does actually reduce the level of inheritance tax that is available for the Exchequer as a whole. Is there a case for looking at inheritance tax rules? Possibly.”

Helm Godfrey chairman Danby Bloch says the statement from Corbyn is an example of an increasingly puritanical approach to tax.

“There’s a spectrum of tax-related activity and minimisation that runs from the most extreme end where you have full-frontal, almost pornographic avoidance through things like tax havens to the very benign and completely encouraged on the other, for example gift aid.

“The needle quite often goes back and forth on that spectrum in terms of what is acceptable, depending on the politics of the day, and the circumstances. But at the moment we are at a point where the needle seems to be such that the most innocent rearranging of your assets is considered indecent.”

Almary Green managing director Carl Lamb adds: “The problem is that all David Cameron has done is to follow the rules and regulations of the day, and that is what proper tax planning does. We are in danger of blowing this out of all proportion.”

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A hurricane of confusion

Treasury committee member and Conservative MP Mark Garnier describes the events of the past week as “a hurricane of confusion”.

“If you are a tax evader then you should go to prison, and if you are avoiding tax then you are using the wording of the law to avoid complying with its spirit, and we should act to stop that. But when it comes to tax planning, it’s absolutely legitimate. If people think the rules aren’t right, then they have to have a debate about it. You don’t randomly start saying that something doesn’t feel right, and act all moralistic about it.”

Garnier adds: “When you have this insane argument going on with random ideas about what is morally right and wrong, you are inevitably going to end up with some pretty peculiar outcomes.

“We have to get back to somewhere sensible, and we have to recognise that actually everybody should be doing a degree of tax planning.”

Association of Chartered Certified Accountants head of taxation Chas Roy-Chowdhury agrees: “We need a reality check and to be brought out of this hysterical mood.

“Should people stop doing basic things like investing in Isas or using their personal allowance, or exemptions on capital gains and inheritance tax? These are questions that, for any politician, the answer should be no.”

Nonetheless, Informed Choice managing director Martin Bamford notes the crisis has also had some upsides. “Obviously, there is a risk here that people are influenced by the media and they don’t seek out the facts as applied to their circumstances for themselves.

“But on the other hand, we’ve also had new clients come to us this week specifically because they’ve seen the headlines and they want to know what they should be doing.”

“The problem is you either police tax according to the legislation or according to the front page of the Daily Mail, and the latter can be fickle”

Front-page policing

One anonymous tax expert describes the weekend’s events as “a witch-hunt by people that don’t  understand what is going on”.

“The problem is that you either police tax according to the legislation or according to the front page of the Daily Mail, and the latter can be fairly fickle.”

However, the expert adds that the problem of separating aggressive avoidance from legitimate  tax planning is in part generated by the complexity of the UK’s tax laws.

“In a perfect world, I wouldn’t have any reliefs in the tax system. That’s where all the avoidance comes from. If you took all of those away and figured out a way to target money back at people you wanted to receive it, you could simplify the whole thing and everyone would know where they stand.”

Meanwhile, Cameron has also responded to the crisis by doubling down on his manifesto promise of corporate penalties for assisting tax evasion, pledging to put pressure on companies with “inadequate supervisory mechanisms”, as well as any businesses that deliberately encourage evasion.

But Roy-Chowdhury gives the plans a lukewarm response: “We need a much more systematic approach, rather than the hysterics that are going on at the moment.

“These plans must be workable and not a belt-and-braces approach that is difficult for companies to comply with.

“Clearly, companies need to have proper systems in place to stop evasion, but if they have those, then if they have rogue employees, then action shouldn’t be taken against that company.”

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. As usual in the popular press we are seeing a blurring of the lines between legal tax avoidance and illegal tax evasion all driven by the politics of envy.

  2. I was told by a leading Edinburgh estate lawyer that the wills of Gordon Brown’s parents were not made public – they were sealed – suggestion was that deeds of variation used to reduce tax – given recent farce should Brown come clean?

  3. So will they stop ISAs, Deeds of Variation, Inter Vivos Term Assurance, treating your married kids to a holiday, new furniture or expensive birthday presents, AIM for IHT planning and all the other commonly used ploys by the moderately well off. The super rich will presumably still benefit from Monaco, Jersey, Malta and Cyprus residence. Will we have a return of the big ocean cruise ships used as residences so that the really rich will always be resident outside territorial waters and therefore pay no tax at all to anyone.

    All this effort by the bureaucrats is akin to trying to hold water in a sieve.

  4. Douglas Baillie 15th April 2016 at 10:24 am

    Investors with simple tax planning investments such as offshore bonds are now becoming needlessly alarmed by ignorant media hype. And if the bond is the asset of an offshore discretionary trust, such as a perfectly proper DGT, run by a perfectly proper Life Assurance company, such as Old Mutual, there is no need for any concern. But do financial journalists know that?

  5. Unfortunately most people don’t know the difference; publishing tax returns made me laugh. With regard to the criminal & aggressive? If only Governments had the guts to do anything about them.

  6. Reduction of top taxraet from 50% TO 45% netted an extra £8bn in taxes. Labour, where are you with TRUE facts? What about publishing the following stats to calm the masses; lowest 60% – tax paid, highest 40% – tax paid; lowest 80% – tax paid, highest 20% – tax paid; lowest 90% – tax paid, highest 105 tax paid? I am a middle England tax payer and we have been shafted by successive Govts. Look at the personal allowances from 2009/10 up to date; now George is giving us back just £500 of the £1000 pa he has taken.

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