Blog: Don’t confuse Panama with efficient tax planning

Phil Anderson is managing director of Aberdeenshire-based Phil Anderson Financial Services

Recently, leaked documents from a Panama law firm revealed the tax avoidance activities of some of the world’s most rich and powerful people.

The incident raised the issue of loopholes in our legal system and the moral judgement of those who use offshore tax havens.

Few people are wealthy enough to be in a position to move assets to offshore tax havens, but financial advisers often talk about tax efficient financial planning for the general public.

These are two very different types of financial planning activity and the two topics should not be confused. The Panama leaked documents reveal the affairs of the very wealthy who chose complicated tax structures in order to get around laws on paying tax in the country where they live.

In the UK there are however simple and legitimate ways to reduce a tax bill, which the Government and HMRC actively encourage us to use, and are not classed as tax evasion or tax avoidance.

Reducing your tax bill legally can be as simple as using an annual ISA allowance or engaging in good Inheritance Tax planning. As April is the start of a new tax year, it is something worth reviewing and considering now.

The Government is keen for people to use their ISA allowance to save and/or invest, and provide general allowances in order to encourage people to use them. The amount you can save or invest into an ISA in 2016/17 is £15,240 and any gains made are not treated as taxable income. You can transfer the money held in an ISA into a different ISA account, or between investments or cash, whenever you choose.

For those who are comfortable in taking investment risk, they could reduce their tax bill by putting their money in an Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT). Both of these investments are designed to encourage private investment in smaller companies by offering tax incentives to the investor. They are far more complex investment vehicles than ISA’s and can involve a significant amount of investment risk in return for the tax breaks, so it would be important to ensure the benefits are not outweighed by the risks.

Although people don’t like to think about losing loved ones, it is important to look to the future in order to minimise the Inheritance Tax paid on your estate.

For those who have a total estate which exceeds the threshold of £325,000 (£650,000 for married couples), then inheritance tax charged at 40% will have to be paid to HMRC on any amount which exceeds the threshold.

There are exemptions which allow a person to reduce future inheritance tax bills and those who have significant savings would be wise to consider using them. Everyone has an annual gift exemption worth £3,000, which removes this money from an estate regardless of how long you live.

In addition, grandparents can give £2,500 to each grandchild who marries; and parents can give £5,000. Gifting allowances are for each person, so a married couple can gift twice the amount.

Wealthier taxpayers can also make regular gifts out of income, which will also be inheritance tax-free and can be paid monthly, annually or eventermly, if, for example, it was to help pay school fees.

Financial gifts which are regularly made and fall outside the general allowances should be carefully recorded.

A letter from the benefactor to the beneficiary stating that the financial gift is being made from excess income is prudent. Provided that the benefactor can genuinely maintain their current standard of living, there is no limit on how much they can gift this way.

If any financial gift is made which falls outside of the allowances then the seven year rule applies. This means that if the benefactor survives the transfer by seven years it is disregarded for inheritance tax purposes.