Don't let the tail wag the dog. A tax saving is not a justification for doing something you do not want to do. The most common example of this is rich parents who impoverish themselves by giving away their capital to the children in order to avoid inheritance tax.
David Oliver, a partner with accountants Arthur Andersen in their Cambridge office calls this 'King Lear syndrome', and tells of one client who had so arranged his affairs that he was dependent on the goodwill of his 16-year- old son for his livelihood.
Use it or lose it. Failing to take up an allowance one year will normally mean that it is lost for good. The annual exemption for inheritance tax can be carried forward one year, and up to six years' previous earnings can be taken into account for personal pension contributions. Personal allowances, capital gains tax allowances and most other reliefs cannot be carried forward at all.
IFA Promotions, which promotes the services of independent financial advisers, has launched a TaxAction campaign publicising these reliefs and the need to use them.
Keep it simple. Many schemes promise to save tax by complicated arrangements involving offshore companies. David Oliver points out one from the days of Development Land Tax which required land to be transferred to a company registered in Andorra and the cash taken out by drawing on an American Express card which the company would pay off.
'The scheme would actually have doubled the tax liability because it fell foul of several anti-avoidance provisions. No good tax planning scheme relies on keeping secrets from the Inland Revenue; it should be possible to explain everything to them and demonstrate that the tax liability has been legally reduced.'
Be prepared. If you are going to make substantial changes to your life in order to save tax then prepare yourself thoroughly. One of the biggest changes that taxpayers sometimes contemplate is leaving the coutry in order to avoid tax. But moving to a foreign country is a big step, and may not be for you.
Dr W G Hill, author of a report on freeing yourself from government restrictions ('PT 1', published by Scope International), is a believer in getting outside the tax net in this way, but asks: 'Will you be happier? Probably, yes, but there are no guarantees.'
What is the worst that can happen? Malcolm Gunn, editor of Taxation magazine, says that when they are unsure whether or not to go ahead, taxpayers should consider what is the worst that could happen if they do. They will often find the risk is minimal.
If the proposed tax saving scheme does not work out, their tax liability will simply be the same as if they had done nothing - all they can lose is the professional fees incurred in setting the scheme up.
He cites a case where a taxpayer was worried about the efficacy of a scheme in the light of a series of cases on tax avoidance. He did not go ahead, and a few months later the Inland Revenue confirmed publicly that schemes like this were effective. Had he gone ahead the worst that could have happened was that the scheme would not have saved him tax - there was no way it could have increased his tax bill. But sometimes the cost is much higher.
Taxpayers entering into regular premium pension contracts must remember that their circumstances may change, and they may not be able to keep paying the premiums. Any regular premium contract that is stopped after a few years will suffer disproportionate charges. Alternatively, if the scheme takes several years to complete, there is the risk of a change in legislation. Inheritance tax saving schemes can take a long time to come to fruition, and there have been four major and many minor changes to the scheme of death duties in the past 20 years.
On their own, these five golden rules will not save tax. But they will allow you to decide which tax saving scheme is worth taking up - and which may lose you money.
Mike Truman is author of 'Personal Investment Planning' and editor of 'Update', both published by Accountancy Books, part of the business arm of the ICAEW
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