In recent months, the tax affairs of high-profile figures have rarely been far from the headlines. Former chancellor, Nadhim Zahawi, was sacked as Conservative party chairman in January after an investigation by the prime minister’s ethics adviser found he had breached the ministerial code over his tax affairs.
Indeed, even the prime minister’s family finances have come under scrutiny with his wife, Akshata Murty, giving up her tax-beneficial “non-dom” status in 2022.
Research published by FTAdviser reveals, interestingly, that media and stakeholder interest in tax affairs inversely correlates to the economic health of a nation. So, with the UK potentially heading for recession amid high inflation and rising interest rates, the tax affairs of the wealthy and powerful are under the microscope.
What this all means is that you will likely have clients who need to walk the tightrope between making the most of the tax breaks available, while also being seen to be doing the right thing.
Walking the fine line between tax efficiency and tax avoidance
Back in 2012, you may remember that the comedian, Jimmy Carr, hit the headlines for all the wrong reasons.
An investigation by the Times revealed that the TV star was among thousands of wealthy individuals using a tax avoidance scheme called “K2” by funnelling millions of his assets through a £168 million Jersey-based company.
After a public outcry – the then prime minister David Cameron called his behaviour “morally wrong” – he apologised and pulled out of the scheme.
Carr’s statement raised an interesting point: “Although I’ve been advised the K2 tax scheme is entirely legal, and has been fully disclosed to HMRC, I’m no longer involved in it and will in future conduct my financial affairs much more responsibly.”
At the time Carr was using the scheme, it was a legal way of mitigating tax. Despite this – think also of Akshata Murty’s non-dom status (also entirely legal) – the public took a very different moral stance on the arrangements.
These days, your high net worth clients are likely to have to meet not only their fiscal obligations, but increasingly their reputational, and sometimes moral, responsibilities too. Simply operating within the letter of the law may no longer be enough – they may also have to acknowledge its spirit.
It’s hard to define “the spirit of the law”
Of course, this can be hard to navigate as there’s no clear definition of “the spirit of the law”. However, it’s increasingly a standard against which taxpayers are being measured.
As a professional, you’re likely to walk the same tightrope as it us when it comes to these matters. Where does “tax efficiency” end and “tax avoidance” begin?
For us, tax efficiency is a key part of a financial plan. It incorporates issues such as:
- Using tax-efficient investment wrappers such as ISAs and pensions
- Maximising a client’s pension tax relief to boost their retirement savings and to draw their income as tax-efficiently as possible
- Making the most of Income Tax allowances, perhaps through pension contributions or equalising income between spouses or civil partners
- Mitigating Inheritance Tax through use of the nil-rate bands and strategies such as gifting and trusts
- Using the available tax allowances, such as crystallising gains up to the Capital Gains Tax (CGT) annual exempt amount or making the most of the Dividend Allowance.
When it comes to the morality of a client’s tax affairs, having a clear position, and being able to explain and justify it, is crucial. In a regulated industry, we always provide clear reasons for our advice, and justification for decisions. No doubt you will do the same.
If you can justify your approach, do so and in an easy-to-understand way. If you can’t, you may need to change your approach if your clients wish to avoid being scapegoated or challenged about their affairs.
When speaking to clients, a range of options is usually available to them – whether that’s financial planning, a legal situation, or an accounting matter. These options typically sit on a spectrum that spans from “conservative” to “aggressive”.
Consequently, any action your client takes should happen after careful consideration of the wider world in which we operate. While there may be an opportunity cost to ignoring tax loopholes, for example, the cost of failing to meet media or public expectations is far greater – as many a politician or celebrity has discovered.
As investor Warren Buffett says: “It takes 20 years to build a good reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”
Get in touch
If you have high net worth clients that would benefit from high-quality and compliant advice from a Chartered financial planning firm, we can help.
Email hello@sovereign-ifa.co.uk or call 01454 416653.
