The last seven years have witnessed a gradual tightening of the tax noose round the neck of the rich. Gordon Brown, the chancellor, has closed loopholes, failed to raise many allowances and exemptions in line with inflation, overseen stricter enforcement of existing legislation by the Inland Revenue and condoned rises in national insurance and council tax.
The wealthy may feel there are few legitimate ways left to reduce the tax they pay, but accountants, unsurprisingly, feel differently.
“There has been a shift in attitudes,” says Simon Rees, senior tax manager at PwC, the professional services firm. “It feels as if trying to pay less tax is seen in itself as an abusive approach.”
The industry has some justification for arguing that people have never needed expert advice so much because many of the government's measures require careful interpretation and an increased burden of compliance and disclosure.
“In recent years the amount of paperwork associated with tax compliance has increased dramatically,” say accountants Grant Thornton. “Keeping up-to-date will ensure that you avoid interest and penalties for failing to comply with the Inland Revenue's requirements.”
This is especially true for those who run their own businesses, particularly husband-and-wife ones, as has been highlighted by a case brought by a small information technology company.
The Inland Revenue is now enforcing a ruling last year on a case brought by Arctic Systems that income from dividends received by a non-earning or low-earning spouse should be taxed at the same rate as the main earner's income.
The move follows a clampdown in 2000 on people who paid themselves a salary in the form of dividends thus reducing their income tax and national insurance contributions by contracting their services through a company which the Revenue felt had been set up purely in order to reduce tax bills.
The government has been particularly enthusiastic in its attack on special schemes set up to avoid tax which, since last August, must now be notified to the Inland Revenue. In December various types of film and partnership tax reliefs were also abolished as well as schemes that allowed employers to reduce tax on bonuses paid to employees. The government has also tightened the net on inheritance tax avoidance, for example by targeting the use of offshore trusts. Even more significant are the new rules on pre-owned assets, which have sought to clamp down on people giving away assets to heirs while still benefiting from them. The new rules are aimed at closing sophisticated schemes such as double trusts. These allowed donors to avoid the “gift with reservation of benefit” rules and, for example, in effective give away their house to their children while still living in it.
From April this year donors will either have to pay income tax geared to the value of the gift or choose to bring it back into their estate. These rules have caused outrage among accountants and lawyers because the legislation is retroactive and applies to all arrangements entered into since 1986.
“This implies that the government could decide in future that it doesn't like a scheme that seems fine at the moment,” says Rees. “It means schemes may well not stand the test of time.”
As well as tightening loopholes, the government has failed to increase allowances to take account of rising prices or incomes. The nil rate band for inheritance tax, for example, has risen in line with the retail price index. But since property values have risen far more quickly than the RPI, many more people have been caught in the IHT net.
Meanwhile the annual IHT exemptions £3,000 can be given away each year without incurring an IHT liability, as well as a range of smaller gifts have not been raised since the 1980s.
Capital gains tax exemptions have also increased only in line with RPI rather than capital asset inflation, which has been much higher. Meanwhile, stamp duty on property purchases 1 per cent over £60,000 in the 1990s is now 3 per cent on the whole amount over £250,000 and 4 per cent over £500,000.
On the investment side, the chancellor has demonstrated a similar lack of generosity. He recently suggested retaining the existing £7,000 maximum permitted contribution into individual savings accounts until 2009 rather than lowering it to £5,000 as had been suggested. But this still represents a freeze in contribution levels in nominal terms and a fall in real terms.
Some tax breaks have simply been abolished. From April, Isa managers, for example, have no longer been able to reclaim the 10 per cent tax credit applied to UK dividends.
This list of loopholes tightened and schemes closed down is not exhaustive, and experts warn that more of the same must be expected if Labour is returned to power in a general election this year.
Nevertheless, there are still legitimate ways to reduce your tax bill. These include making use of available allowances and taking advantage of surviving tax breaks for example, on investment in venture capital trusts, enterprise investment schemes or forestry.
Some tax avoidance schemes are still working such as the “lend a bonus” scheme, where company directors can loan back bonuses to their company and then charge interest on the loan. There are still innovative ways of reducing IHT bills, particularly by using the nil rate band in the most effective way possible.
However, accountants warn that you should be aware that tax avoidance schemes that exist today could be targeted in the future. “The government has made clear that it takes tax avoidance very seriously and will not hesitate to take action against the most offensive examples,” the Revenue says sternly.
Grant Thornton suggests that offshore roll-up funds, where any profit is treated as income but no tax is charged until the bond is encashed, may be next on the agenda. It says that the Revenue is looking at ways of “rationalising” the taxation of these funds.
Inheritance tax looks like another tempting target. Campbell Edgar, director at Bloomsbury Financial Planning, says the government might consider introducing new IHT bands. There could be a “basic rate” band at which IHT is payable at 40 per cent and a “higher rate” band the tax would be chargeable at more than 40 per cent.
“We may not return to those halcyon days of squeezing the rich,” he says ironically. “But we can definitely expect more along the same lines.”
