Tax planning is all very well, laudable even, but it isn't without its problems. Fortunately, you're reading the MeaningfulMoney guide to tax planning pitfalls. In short, you're in the right place!
Tax planning pitfalls
I've said before that here in the UK, our tax legal code is one of the largest of any developed nation. Tax is complicated, and it is therefore understandable that people get tripped up. Here are five tax planning pitfalls you need to keep an eye out for:
Being unprepared
Many people I know spend days and even weeks planning their summer holiday each year, and practically no time at all planning their one-day retirement. It's amazing how we can be very prepared for irrelevant things, while missing the boat with the big stuff.
Many day-to-day decisions have tax consequences. If you're going self employed, you need to let HMRC know. If you make a gift, you should keep a record in case it is questioned after you die. If you sell something for a loss, you may be able to offset the loss against future gains.
The best and most important way to avoid the potential pitfalls of tax planning is to keep your eyes open, educate yourself and be prepared. That's why you're reading this, right?
Legislation changes
There have been several occasions throughout my career where people have arranged tax-efficient plans, only to have the legislation change around those plans. This has rendered them ineffective, or worse, disadvantageous.
Plenty of people rewrote their wills to make sure the nil rate band was used when the first spouse died. Then the transferrable nil rate band came into force in 2007, and many of these wills had to be rewritten. Not the end of the world, but an expensive hassle.
HMRC is cracking down on tax-avoidance more than ever, with legislation like the General Anti-Avoidance Rules, and they are constantly looking to close loopholes.
Before any tax planning decisions, always consider what would happen if the scheme you are considering would no longer work due to legislation changes? Could you unwind it? Could you get your money out?
Life changes
Legislation changes are one thing, but even more likely are changes to your personal situation.
Be careful giving things away to children, only to have their relationship break up and mess up all your plans. Be careful about locking too much money up for too long; you might need access to it earlier than you think.
Again, make sure you can unwind any tax planning scheme you get into if your circumstances suddenly change. I have more than a few clients whose marriages broke down after retirement, so anything can happen, and your plans may have to change.
Hold things lightly, and arrange your finances in such a way that you can pivot if you have to.
Costs
Tax planning schemes can be costly. EISs and VCTs and other investment structures sometimes have performance fees attached where you give up a proportion of your performance in fees to the manager.
The more complex schemes which involve shifting money offshore via bespoke trusts, will cost you a fortune in fees to the lawyers and accountants setting them up. And when (not if) HMRC challenges them, it'll cost you a lot more in back taxes and court fees.
For most of us mortals, engaging in tax planning simply adds a further layer of cost to an ordinary investment. You must decide if the potential tax benefits are worth it.
Incorrect understanding
Probably the most insidious of all tax planning pitfalls is the danger of a little bit of information. I have lost count of the times I have had to correct people who thought they knew something about saving tax, or about investing, and had actually made mistakes, some of them big ones.
Most people know about the seven-year rule for inheritance tax on gifts, but few people understand pre-owned asset tax, or the gifts with reservation rules. Inheritance tax is one of those things that people talk about in the pub or at dinner parties, but really folks, the rules are complex and nuanced, so you should treat these conversations with a pinch of salt.
You probably know what I am going to say next: you should seek advice if you are in any doubt at all. There's a wealth of information on this site, but applying that information to an infinite number of subtly different real-life situations is the skill of a professional accountant, solicitor or financial adviser. It's why we have jobs after all!
So please be careful when tax planning, or investing, or giving money away. There are many potential pitfalls to avoid, and the best way is to seek professional advice.
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