We are sailing...to find a tax haven

City workers are likely to be rubbing their hands in glee as another hefty bonus season approaches. According to the Centre for Economics and Business Research, almost £9bn will be paid out over the next few months to the City’s elite, up around a quarter on last year’s figures.

But recipients of bonuses should also prepare for an uphill battle with the taxman as many traditional ways to shelter windfalls from tax have been stamped out.

The Revenue has taken an extremely hard line against tax avoidance schemes since new disclosure rules came in two years ago. Creative tax-efficient schemes now have to be declared to the Revenue, giving it an easy route to spot the most popular ones and wipe them out.

Last week’s pre-Budget report brought more bad news as the chancellor attacked a number of popular schemes that aimed to cut individuals’ tax bills by creating artificial capital losses against which to offset income.

Tax experts say there is now a shrinking pool of schemes that investors can use to protect their income or profits. Investors are increasingly having to make do with Revenue-approved schemes such as pensions, venture capital trusts (VCTs) – although the tax relief on these has been watered down – and Enterprise Investment Schemes (EISs).

One tax scheme provider says: “The government is now much more prescriptive in terms of anti-avoidance. It has introduced many more rules and is a lot more aggressive in closing down schemes before they even take off.”

He says the market has become much more polarised into the “plain vanilla” tax-efficient investments such as pensions, and the more aggressive, high-risk schemes still being discreetly offered by some companies.

“Every percentage point saving of the higher rate tax charge is being achieved at a greater and greater risk,” he says.

Tax experts say clients have started to treat their tax planning as they would other asset classes such as equities.

“People are no longer going wholesale into one scheme. They are looking for ways to diversify their risk by spreading their investment in case one scheme gets closed down,” says one.

One blessing for high earners is that this year they can invest significantly more into their pensions.

The “A-day” rule changes introduced this April brought in much higher contribution limits. Savers can now put 100 per cent of their income into a pension, up to a maximum of £215,000 for the current tax year, rising to £225,000 next year.

Accountants and advisers expect a large chunk of bonus money to flow straight into pensions in the new year.

VCTs – funds that invest in small or unquoted companies – and EISs – which invest in single companies or a portfolio of companies – also still have valuable tax breaks, even though the income tax relief on VCTs was cut from 40 per cent to 30 per cent earlier this year. Investors can contribute £200,000 to VCTs and up to £400,000 to EISs in any one tax year.

But many investors who have used up their allowances or who do not want to tie their money into such long-term investments are turning to ever-more adventurous schemes to protect their funds from punitive tax charges.

David Kilshaw, partner at KPMG, says: “People are now looking for assets that they can explore commercially and also gain tax relief from.”

Yachts and light aircraft, for example, still provide a relative haven for tax relief as any income gained by chartering them out can be offset against the depreciation in the value of the asset. There are also still a number of schemes that invest in technology, scientific research or green issues such as carbon offsetting.

Tax experts say demand for vehicles such as yachts and aircraft is likely to heat up next year.

Investors who buy a yacht, for example, and then charter it out through an agency or simply by advertising it themselves qualify for a capital depreciation allowance of 25 per cent of the asset’s value per year. Any income gained through chartering out the asset can be set against this depreciation allowance and therefore will escape income tax.

If a boat costs, say, £200,000, in the first year, the buyer would be able to offset £50,000 of depreciation costs against income from chartering out the boat, meaning the first £50,000 of income would effectively be tax-free. In the second year, the allowance would be 25 per cent of the remaining 75 per cent of the boat’s value – that is, 25 per cent of £150,000 or £37,500.

These allowances are available only if the vehicle is being actively chartered. But you can also reserve the yacht or aircraft for between two and six weeks a year for your personal use for nothing – an added attraction for some stressed-out City workers.

But Roy Maugham at UHY Hacker Young, the accountancy firm, says that some people are choosing to pay (themselves) the going rental rate for periods when they want to use the yacht, to avoid losing any of the tax allowance. “The yachting industry is growing considerably because of City bonuses,” he says.

Nick Osler, director of private client tax services at Smith and Williamson, says there are also a number of other commercial schemes that tap into certain research and development allowances.

Future Films, which is relaunching as Future Capital Partners in the new year, is looking at a number of different asset classes as traditional sale and leaseback film schemes are being phased out. The group plans to launch schemes that involve investment in transport, property, pharmaceuticals and renewable energy.

KPMG’s Kilshaw warns that the government has proved it is willing to introduce anti-avoidance legislation retrospectively. So any schemes that gain in popularity could be shut down, and worse, any tax saved claimed back in the future.