MANY READERS will realise that I have ‘borrowed’ the title of this article from the UK Inland Revenue’s media campaign. I couldn’t resist the irony of using this statement in an article about preventing the Revenue and other authorities from sapping your wealth through tough tax regimes.
I’m not sure that the Inland Revenue would appreciate my usage, especially since it’s on a quest to reduce tax avoidance possibilities. Earlier this year it issued a statement announcing that it had joined forces with the US, Canada and Australia to tackle the tax avoidance industry. Economic Secretary, John Healey, said: “Tax avoidance and the industry that drives it are increasingly an international phenomenon, and it is vital that we have effective international co-operation to tackle it, as we do for tackling terrorism, organised crime, money laundering and fraud. The joint task force is a real practical step forward”.
This statement, in particular the association of tax avoidance with terrorism, prompted an angry response from the editor of Offshore Investment magazine, Charles A. Cain. The Revenue’s ploy seems to be to purposely blur the distinction between ‘tax evasion’ and ‘tax avoidance’. Tax evasion is a crime under money laundering laws and money laundering is linked to terrorism. Tax avoidance, however, is fully legal.
Cain makes this distinction clear, arguing that, “the international tax planning industry is not merely legal, but an essential part of a society which recognises that… an individual has the absolute right under the law to organise his affairs so as to reduce his tax liability to the minimum properly required by the law.”The US Internal Revenue Service is even stricter than the UK’s authority. Yet a US Judge has also decreed that “anyone may arrange his affairs so that his taxes shall be as low as possible. He is not bound to choose that pattern which best pays the Treasury… Over and over again the courts have said that there is nothing sinister in so arranging affairs to keep taxes as low as possible. Everybody does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands.”
Tax avoidance is not ‘sinister’ or criminal – it is legal and smart planning. What is not legal or smart is tax evasion. This is when you breach the letter of the law, and includes simple discretions, like omitting to declare all your income and assets, even those held ‘offshore’. Previously, banking secrecy laws and a lack of co-ordination amongst tax collectors worldwide meant simple deceptions worked. But times have changed and today all respectable offshore jurisdictions have signed up to the new requirements for customer identification, anti-money laundering laws and exchange agreements on tax and income earnings. Some of the world’s most voracious tax collectors are also clubbing together to create an impenetrable information net. All this sounds rather frightening, especially the Inland Revenue’s rhetoric. At this point, however, I reassert the title of this article – tax doesn’t have to be taxing. With the right advice (from experienced financial professionals and/or tax experts) it’s possible to set up your financial affairs to legally lower your tax bill. A little time invested in looking into what careful financial planning can achieve can bring huge tax savings and other benefits. This is whether we are talking about income, inheritance, capital gains, wealth taxes, or whether the tax authority is the Inland Revenue or local authorities in Portugal.
One example of smart financial planning is the use of insurance bonds. The life company issuing the bond will pay no tax on the income or capital gains within the underlying funds. This is known as ‘gross roll up’ and can potentially boost returns. If you don’t take withdrawals, you don’t pay tax. Withdrawals are often taxed very favourably, depending on where you are tax resident. Switching between funds within an offshore bond does not generate any tax liabilities either. It’s worth finding out what the rules are in your area and how much tax you could save. Insurance bonds are legal and accepted by international authorities as a reputable financial planning structure.
Another effective means of tax planning are offshore trusts. If set up correctly they can help you mitigate a whole range of taxes. With the right guidance you will easily understand how they work and the many benefits you and your family will receive.
These include capital protection, confidentiality, favourable tax treatment, avoiding forced heirship laws, continuity on death, speeding up probate and consolidation of assets. They can be tailored to meet your specific needs and wishes.
Just make sure that your financial planning is based on a solid analysis of tax legislation. Professional advice is essential. You also need to carefully consider the location for your insurance bond and trust. EU issued insurance bonds are usually given more beneficial tax treatment than non-EU policies.
Ensure that the jurisdiction you choose for your trust has the necessary laws to safeguard you. Tax dates back thousands of years. The first recorded evidence is dated 2350 BC, and man has been trying to avoid paying tax ever since. In 11th century England, Lady Godiva successfully reduced her husband’s tax assessment by riding naked on a horse through Coventry. Thankfully, we no longer have to resort to such measures. A meeting with a professional financial adviser should prove even more effective.
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