The UK tax system is notorious for its complexity, leaving many UK taxpayers feeling bewildered about their tax obligations. While paying taxes is a legal duty for every citizen, understanding how to minimise tax liability within the law is a smart financial move. This blog will outline several legal strategies that a UK tax resident can implement to manage their taxes effectively.
Invest in Pension Schemes: Making contributions to your pension fund is a tried and tested method of legally reducing your taxable income. For most people, contributions towards your pension can receive tax relief up to your annual income or £60,000, whichever is lower. Even if your earnings are lower than £3,600 a year, you could even have zero earnings, you will receive tax relief on contributions up to £3,600 a year. After age 75 individuals no longer receive tax relief on pension contributions.
Invest in Offshore Pensions: Certain offshore pensions such as QNUPs (Qualifying Non-UK Pension Schemes) and QROPs (Qualifying Recognised Overseas Pension Schemes)are excellent tax shelters as they are exempt from Capital Gains Tax and Inheritance Tax. They are particularly suitable for high-net-worth individuals (HNW) and ultra-high-net-worth individuals (UHNW), especially property entrepreneurs.
Invest in Exempt Property Unit Trusts (EPUTS): These investments offer unique tax advantages because they are exempt from all UK taxes. They are particularly suitable for property owners because they allow investment into both residential and commercial property. What’s more mortgage borrowing is allowed on normal commercial terms, typically up to 60%-70% LTV or loan to value. Such investment can only be owned by tax-exempt structures such as certain pension schemes.
Offshore Trusts: Worth considering if you are a wealthy individual. Offshore trusts can offer the opportunity for the roll-up of potentially tax-free capital gains and income, for reinvestment by the trustees. There can also be non-tax advantages, including asset protection, succession planning and more confidentiality as compared to a UK trust. The trustees would have to be independent offshore trustees.
Take Advantage of the Individual Savings Account (ISA): An ISA is another powerful tool for tax-efficient savings and investment. The money invested in an ISA can grow tax-free, and when you withdraw it, there are no taxes to pay. On death there is Inheritance Tax to pay which can be avoided if you invest in AIM ISAs for at least two years. As of the tax year 2023/2024, the maximum amount you can invest in an ISA is £20,000 per person each year.
Use Capital Gains Tax Allowances: Capital Gains Tax (CGT) is a tax on the profit when you sell certain assets that have increased in value such as shares, investment properties and businesses. However, you only have to pay CGT on your overall gains above your tax-free allowance (called the Annual Exempt Amount), which is £6,000 per person for the 2023/2024 tax year. Plan your sales of assets to make full use of this allowance each year.
Transfer Assets to Spouse or Civil Partner: Transferring assets to your spouse or civil partner can be a clever way to minimise taxes as transfers between spouses or civil partners living together are typically exempt from CGT. If your spouse or civil partner is in a lower tax bracket, it could also reduce Income Tax due on any income generated by the asset.
Incorporate as a Limited Company: If you’re a freelancer or a small business owner, incorporating as a limited company might save you taxes. Company profits are subject to UK Corporation Tax, which can be lower than personal income tax rates. However, note that this option comes with increased administration and regulatory requirements.
Donate to Charities: Donating to charity can reduce your taxable income and help a good cause at the same time. The government encourages charitable giving by providing tax relief on such donations through schemes like Gift Aid.
Emigrate: If you are particularly hung up about taxation in the UK you could always emigrate to a country which has lower taxes. Some countries have no capital taxation (Inheritance Tax and Capital Gain Tax) and lower Income Tax rates. Even countries on our doorstep such as the Isle of Man or the Channel Islands offer tax-friendly regimes like this.
Avoiding tax evasion is crucial – it’s illegal and could result in heavy fines or imprisonment. However, tax planning and tax avoidance (the legal counterpart to tax evasion) can be helpful in managing your financial health. It’s always recommended to consult with a tax adviser before making any decisions, as tax laws can be complex and are subject to change. Remember, the goal is not to eliminate taxes completely but to understand your obligations and make smart choices within the legal framework. You know it makes sense.*
The Financial Conduct Authority does not regulate taxation advice, estate planning or inheritance tax planning. The information provided in this article is for educational purposes only and should not be considered financial or investment advice. Please consult with a qualified professional before making any investment decisions. The value of investments can fall as well as rise. You may not get back what you invest. The information contained within this blog is for guidance only and does not constitute advice which should be sought before taking any action or inaction. All information is based on our current understanding of taxation, legislation, regulations and case law in the current tax year. Any levels and bases of relief from taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. This blog is based on my own observations and opinions.