Should we be paying more tax or less?
Taxation is back in the news again, be it the mansion tax or the announcement that HMRC are to investigate 7,000 Employee Benefit Trusts which could involve £1 billion in tax revenues.
When looking to increase tax revenues, politicians face the classic dilemma as to whether increasing the rate of tax will increase revenues or actually decrease them as it can discourage wealth creation or drive people abroad.
A bit of a case of "killing the goose that lays the golden egg".
You may recall earlier in the year David Cameron commenting that the UK would welcome anyone from France who was upset by the tax increases over there.
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There has, of course, been a whole industry built up to avoid tax, legally (as opposed to evasion, illegally).
This year the high publicity cases, such as that involving Jimmy Carr, have brought such schemes far more to the public's attention. That, coupled with a Government minister saying people should not be paid in cash has almost made saving tax a taboo subject.
If we ignore VAT the main tax people are aware of is Income Tax and this is by far the biggest revenue generator for the Government. Capital Gains Tax and Inheritance Tax are lower profile and generate far less income.
As a general rule any money should be subject to one of these three taxes, but which tax can have quite major implications. When looking at an investment it is generally preferable to have it charged to Capital Gains Tax than Income Tax.
This is because the personal allowance for Capital Gains is higher than that for Income Tax (at least for under-75s) and the maximum rate of tax is lower.
Trying to save tax is, on a personal level, undoubtedly a good thing.
However, getting it wrong can be expensive. For example, where a father gifted their home to their children in say 1990 but continued to live there not paying rent this would be caught by the "gifts with reservation" rule. On the father's death the property will still count in his estate for Inheritance Tax.
Not only that, but on sale of the property the children will be considered as owning the property since 1990 and as they did not live there, they will be liable for capital gains tax on any profit over their annual allowances for the increase in value since that date.
With trying to save tax it is not so much "failing to plan is planning to fail" more "failing to plan properly is planning to fail".
As mentioned in previous articles there are obvious tax saving exercises that everyone should consider, such as using ISA allowances and checking taxable income (for example, savings interest) is held in the correct name. Further advice is available using the contact details below.