Tax Planning Flashcards
What distinguishes tax avoidance from tax evasion?
- Tax avoidance: Efficient, lawful arrangement to minimise tax liability
- Tax evasion: Taxpayer withholds information about assets or income, or takes steps to avoid paying tax they are liable for. Unlawful, and may be illegal.
Does HMRC tolerate all tax avoidance?
No. “Aggressive” tax avoidance occurs when loopholes, oversights, or drafting errors in tax legislation are used with intent to lower tax liability.
These are legally compliant on a literal interpretation of the law. However, HMRC takes a “purpose-based” interpretation, challenging such arrangements as not reflecting Parliament’s intent.
What is HMRC’s main tool for tackling aggressive tax avoidance?
The General Anti Avoidance Rule (GAAR)
What are the 3 criteria for the GAAR to apply?
- Arrangement gives rise to a tax advantage: reduction, deferral, or avoidance of tax.
- It is reasonable to conclude the main purpose of the arrangement is to obtain a tax advantage.
- The arrangement is abusive.
What is the test for whether an arrangement is “abusive”?
The arrangement cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances.
“The double reasonableness test”
What are the key lifetime IHT planning tips for a cash-heavy estate?
- Annual Exemption: Up to £3,000 p/a (potentially x 2 if rolled over). Over time, significant amounts can be given away.
- Family Maintenance: No cash limit. Must satisfy needs (eg sustenance, accommodation) of family member, usually does not cover purchase of an asset (eg, car). Covers care/nursing costs. But, use a loan if recipient estate is already large to avoid increasing their potential IHT liability.
- Normal expenditure out of income: can be useful for clients with large incomes eg pension.
- Spouse: fully IHT exempt transfer. Spouse can then use their Annual Exemption, Small Gift Allowance, Marriage Allowance etc.
- Charity: Giving 10% or more of net estate to reduce IHT rate to 36%.
Can the client combine the AE with other allowances?
- Cannot use Small Gifts (£250) to same person as AE.
- Marriage exemption can be used with AE.
What are some more obscure tax planning strategies?
- Buy a farm, or business property. Claim BPR / APR at death (up to £1m each from April 2025). ‘Converts’ cash into a tax-relieved asset.
- Get a fixed term life assurance policy to cover potential tax on a failed PET.
What is the most obvious form of IHT tax planning?
Making a gift of the £325,000 Nil Rate Band, as this will always be exempt (providing no other gifts made in the 7 years after and donor survives more than 7 years)
How can trusts be used to effect tax planning?
Divesting real property into a discretionary trust will cause the value of any property held on trust to fall outside the taxable estate.
However, the initial transfer of property held on trust will likely constitute an LCT. Further, any residence will cease to benefit from the Residence Nil-Rate Band.
