Is minimising the tax our businesses, ourselves and our families pay legitimate and ethical?
Most tax planning rules are written for the benefit of society, either a specific sector or as a whole.
Examples of this are:
Pensions: the encouragement to fund for retirement by providing income tax and capital gains tax allowances and exemptions for Pensions and ISAs.
Gifts to trusts or beneficiaries 7 years prior to death: gifts of significant size which are made less than seven years before the death of the giver are generally liable to IHT albeit subject to a sliding scale depending on the date of death. Such gifts are Potentially Exempt Transfers (PETs) and according to personal accounts released by David Cameron in 2016, in 2011 he received 2 PETs totalling £200,000 . If his mother, the donor, lives until 2018, Cameron will save £80,000 IHT as 100% relief on the gifts will have been achieved: If the gifts are given over 7 years before the death of the gift give they are exempt from IHT
IHT Taper Relief on Gifts 20% in year 3-4 ,40% in year 4-5, 60% year 5-6, 80% year 6-7. 100% after 7 years.
Home owner additional Inheritance Tax (IHT) allowance: the increasing allowance for homeowners to pass on the family residence to a direct relative on death.
The government has proposed an additional band which will be introduced progressively – £100,000 in 2017/18, up to £125,000 in 2018-19, £150,000 in 2019-20, and £175,000 in 2020-21. From 2021-22 onwards it will increase in line with inflation.
Business Property Relief (BPR): puts the Asset outside the estate after 2 years, whilst allowing total control and access.
The above are all legitimate and form part of established planning
The Ethical question is one of personal choice
In the case of your residence, the local authority can use the sale of your residence, under certain circumstances, to pay for your care. Most families understand that and know that care is expensive. Does someone else pay for or provide the care? Or will your care bill be funded by the sale of your residence? The Inheritance Tax Homeowner Additional Allowance, in most cases, becomes irrelevant. In my opinion this presents no ethical issues. Your needs are taken care of, during your lifetime.
Passing assets (not the family home) to beneficiaries as an outright gift and living 7 years works if you are happy to give total control of those assets to someone else.
The family home can only be gifted in this tax beneficial way if you do not continue to live in it, or pay a commercial rent for it. Depriving yourself of assets and then requiring care generally results in the asset being reclaimed by Social Services for your care fees, unless the asset is gifted at a time when you are in good health and demonstrably is surplus to your needs and for IHT planning purposes.
Business Property Relief (BPR)
You do not need to run your own business to benefit from BPR. They are an established tax efficient way to move assets out of your estate (after 2 years) whilst still keeping control.
The ethical issues are:
- What the money is used for once a BPR structure is created.
- Are the returns steady and sustainable and is it being used for a good outcome.
Judge for yourself if you consider any of the following for the good of society and/or the environment:
- Alternative energy: solar, anaerobic digestion, hydro or wind.
- Provision of energy efficiency and energy reduction schemes for the leisure and industrial sectors.
- Providing funds for local government through leasing of capital equipment, such as refuse trucks.
- Secondary Private Finance Initiatives, facilitating the building of schools, hospitals and other public services .
- Funding the capital equipment for the NHS, such as ambulances and medical equipment
- Providing much needed capital for small businesses.
In times when deposit accounts are returning next to nothing, many of these schemes provide a secure income, backed by tangible assets, with limited downside risk.
If you require access to capital or income, there will be a BPR that fits your needs. Crucially they allow you to move money from your estate, after 2 years, keep control of the investments and save 40% tax for the next generation. Retaining access and, if required, receiving a steady income.