Tax avoidance is much closer to home than you think

Coverage of David Cameron’s troubles in recent weeks over potential tax avoidance using offshore trusts in exotic tax havens has mostly missed the point.

dc-large_trans2oueflmhzzhjcyuvn_gr-bvmxc2g6irfbtwdjolshwgAs far as we know, he did in fact pay full UK tax on the small capital gains he made via the offshore trust that his father had managed. We also learned, however, that he had inherited £300,000 from his father in 2010, and had subsequently received gifts totalling £200,000 from his mother. On these two windfalls he paid zero tax. Nothing. If the mother dies within 7 years of the gifts being made, he might be liable for tax on that payment, but let’s assume (and hope) that she is in tip-top condition and lives for many years to come and he therefore gets to keep the lot.

Jules Birch, in his recent blog post points out that in the period since becoming UK Prime Minister, Cameron has also seen the value of his London home increase by approximately £1.3 million. If he realised that gain now, he would probably be liable to pay some Capital Gains Tax as it is not currently his home. However, if he chooses to live in it again for a period before he sells it, he can re-assert it as his main home and avoid paying any taxes on this future windfall.

So, in summary Cameron will have received £1.1m (£300k inheritance, £200k gifts, £650k his half of the profits from the London home) and paid not a single penny in tax.

This is of course, within the current rules, but then so is all tax avoidance.

If Cameron had earned that extra income from work he would have to pay taxes in excess of £400k, but the UK tax system is deliberately set up to place a disproportionate burden of tax on income from work, while having significant loop-holes, allowances and escape clauses for income from assets and unearned windfalls.

And yet, the response to the publication of his tax affairs was to highlight the one area where he had actually paid tax. Maybe this is because most of the people writing the stories are also hoping to benefit from these same loopholes in future. Maybe  they have an inheritance coming their way; perhaps they dream of selling their own homes for a bumper profit and then running away with the proceeds to a sunnier and cheaper country?

The public attitudes towards this form of tax avoidance seems to be remarkably tolerant. Perhaps that’s because the public don’t realise what a huge difference closing these loopholes would make to them.

If all forms of income were taxed in the same way (as in the Flat Tax proposed here), it would allow the rate of taxation to fall to just 25% for everyone, while also removing Employers National Insurance which merely acts to reduce wages/salaries. This would represent a significant tax cut (and perhaps wage rise) for most working people and an unavoidable hike in tax for those who never normally appear on the tax radar.Under the Transformation Deal, Cameron would be subject to a tax bill of £575k on the settlement outlined above (so far!) This would be mostly in the form of Land Value Tax on his ever-appreciating home, but also Flat Tax on his parental windfalls.

Some argue that this is unfair in some way, but I find it the argument that income that is not earned should be taxed at a lower rate than income that is earned extremely unconvincing.

It is an argument that is usually part of an emotional defence of what some people are hoping will be their future tax-free windfalls. These hoped-for gains often come in the guise of capital gains, inheritance or dividends payments, but mostly in the form of home sales with big profits.

Because the most important area of tax avoidance for most people comes in the form of the profit they make on their own home – and that is not something they are happy to share with the taxman.

So tax avoidance isn’t just closer to home, for many people it is home!

 

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s