In the Labour manifesto, two years ago, McDonnell together with Corbyn, proposed to introduce a 50% top rate of income tax; up 5%, on net income above £123,000 and 40% on net income above £80,000, to howls of protest.
Only a few years later, now, Hammond and Gove have come around to the Labour way of thinking. Michael Gove talks of British capitalism being ‘rigged’ in favour of elites, and Philip Hammond, is on record as saying that the economy needs ‘higher taxes to provide services to a greying, weakening population’.
So, it looks we are set for higher tax rates whatever the colour in Government next – what does it matter?
From 1932 to 1980- the average top rate of tax was 81%. Under Ted Heath’s government in the 1970’s, it was 75% with a 15% surcharge. Even under Margaret Thatcher it was a 60% top rate, until the last two years of her reign. So why is there such alarm now?
Because we are not used to anything other than low tax rates!
But do you really think, before Lady Thatcher slashed the top rate of tax, high tax payers, simply sat back quietly and paid it? Remember this was not a time at which you could squirrel your money outside the UK. Until 1979, exchange controls were in place – so what you made in the UK, stayed in the UK.
Many wealthy families during this time, left the UK, to live in Switzerland or Monaco. With the prospect of higher rates of taxation, we are seeing the same thing again. An unprecedented number of families are looking for a bolt hole abroad in case tax rates rise again too high. Monaco and Switzerland are again the favourites, but with the exponential explosion of communication and travel since the 1970s, many are looking further afield; Dubai, Singapore, Bahamas or wherever convenient for family and business reasons
Those who could not move looked for other ways.
Post 1979, non- doms set up trusts offshore (not least as a result of my articles in the weekend FT on the benefits of offshore tax planning for non-doms). These trusts, however, are now vulnerable to attack since the introduction of the automatic exchange of information and the requirement to correct.
Of the 92,000 non doms currently living in this country most have set up offshore structures decades ago with little supervision or monitoring, since. They were out of sight and mind, but with pressure now mounting on offshore financial institutions– these structures are under scrutiny and should be reviewed by an independent professional before HMRC gets a look in.
All trusts now need to be independently reviewed to ensure they are as robust and tax efficient as they could be.
But if you are UK dom and do not wish to leave the country, what can you do? Ask whether you are employed or could be self-employed? The self-employed can make arrangements to pay less tax.
You are employed if you work for one person or company, and that person calls the shots as to what you do, the days you work and the hours. However, if you call the shots and are or could work for several companies or businesses, it may be possible that you could be self-employed.
If so, you should consider setting up a limited company in the UK, to which you subcontract your services – why? Because, companies pay 19% tax, whereas, if you were employed or self-employed in your own name, you would pay a maximum of 45%.
Kate is a business consultant. She used to work for a large agency, until her major client asked her to leave and work for it. Rather than work in-house, she negotiated a free-lance contract which meant she was free to work for other clients as well, which she did.
To begin with Kate earned £320,000 a year. However, she now no-longer receives this income, her company TTC Limited is the recipient, and it pays taxes at only 19% rather than Kate’s top rate of tax at 45%.
In setting up the company, Kate loaned it £600,000, so for the first two years, the company was repaying her loan so she paid no extra personal tax.
Kate’s business requires her to travel abroad on business marketing trips. The travel and accommodation is paid for her by TGC Limited which is deducted against its profits so the expenses are tax free. However, expenses on client entertaining, dinners and drinks, are not deductible, but nevertheless Kate has a company credit card and the company pays the bills.
However, although the expenses are not tax deductible for the company, they are still business expenses, and are not treated as a benefit in kind from the company to Kate. This means that she is not taxed at her tax rate of 45% on the client entertaining expenses incurred by her company TCC Limited.
Because TCC Limited does not get a deduction for entertaining clients, Kate prefers to get to know her clients through client workshops and educational presentations, with drinks and canapes thereafter. The cost of running these workshops and training programs are wholly tax deductible by her company, including the food and drink.
Given the huge discrepancy in tax rates between the corporation tax rate and the higher personal tax rate it is hardly surprising that this form of tax planning has started to attract a lot more interest in recent months.
If you would like to know more about getting a review of your trust offshore or how to plan, using traditional tax planning methods, contact me at caroline@garnhamfos.com or phone on 020 3740 7422 or 07979 188 288. Also, if you would like to buy my book, ‘When you are Super Rich Who can you Trust?’ please buy from Amazon or contact me direct.