To avoid tax you have to do a thing which cuts your tax bill.
Fail to do that thing and your tax bill is higher. But do it and you’ve avoided tax compared with an alternative world – economists call it a counterfactual but you and I would call it an overdraft – in which your tax bill is higher.
If this all seems a bit, well, metaphysical, it shouldn’t.
When Ian Cameron died, David Cameron received £300,000 in his will. That’s just below the maximum amount you could, at the time, pass on free of inheritance tax. Most or all of the rest went to David’s mother and, because she was Ian’s wife, it went tax free. She promptly gifted the Prime Minister a further £200,000 by way of what Downing Street is describing as an equalisation payment (a payment to ‘equalise’ the money that the children received from their father).
That’s the real world. If she survives the gift by seven years that will save £70,000 compared with an alternative world in which the money went straight from Ian to David.
The mere fact of making gifts whilst you’re alive can – if you’re wealthy at least, because only a very few people are rich enough to pay inheritance tax – avoid inheritance tax. But I wouldn’t describe it, without more, as meaningful tax avoidance. It’s a rule that the statutory draftsman has created and you’re using it as she intended.
But what takes this little two-step into the realm of meaningful tax avoidance is that it would have been known before Ian’s death what sum David needed to get in Ian’s will to ensure he received the same amount from his father as his siblings.
The natural thing to do – and so to me the appropriate ‘counterfactual’ to what actually happened – would have been for Ian to make the gift in his will. But instead Ian gave him a sum of such a size that there would be no inheritance tax to pay. And then David’s mother gave him a little bit more in such a way that, if she outlived the gift by seven years, there would have been no inheritance tax to pay.
Compare that counterfactual to what actually happened and there’s a £70,000 inheritance tax saving.
I think this is, in a meaningful sense, tax avoidance.
Follow @jolyonmaugham
Waiting for Godot 
I agree and HMRC could well have challenged this under the associated operations rule in the Inheritance Tax Act. However, is this any more avoidance than the fancy will variation footwork of the Miliband family when Ralph Miliband died?
The more important point which this highlights is that the ability, in particular, to make lifetime gifts free of inheritance tax has made inheritance tax largely voluntary for those with wealth and liquidity. The opposite is true for the lower middle classes who increasingly bear the burden of this tax. A fairer system would largely do away with tax-exempt lifetime gifts of any size and impose a progressive scale of tax rates on gifts and inheritances. This was more or less the position under capital transfer tax pre-1986.
I wondered about the associated operations point too but couldn’t remember whether it bridged death. ‘HMRC fails to challenge Prime Minister’s tax avoidance’?
I think this is worse than the Ralph Miliband thing (at least as I recall it), because that was a pro-purposive use of a relief… There’s a clever two step here…
I don’t understand the siblings bit. I though inheritance tax was paid on the estate not the recipient so do we assume they had their inheritance as gift or something that didn’t count towards the limit?
My understanding is that the gifts are not in IC’s will.
Ah ok – so she gave the other siblings gifts of 500k and only he inherited 300k plus the 200k.
On the associated operations point, HMRC’s IHT manual (IHTM14833) says:
“Where property given unconditionally by one spouse or civil partner (IHTM11032) to the other is subsequently transferred by the latter to a third party, you cannot use the associated operations provisions to attribute the transfer to the first spouse or civil partner.”
This is in the context of lifetime transfers but it would be reasonable to assume that transfers on death would be treated the same.
My understanding is that the only time HMRC would seek to overturn this is if the original gift is conditional upon the subsequent gift being made.
Thanks Gareth.
3 questions Jolyon.
1. “My understanding is that the gifts are not in IC’s will.”
OK. So explain the two step again Jolyon and any evidence you may have to support that.
2. I’m having fun this weekend with a couple of friends of mine who share your poitical persuasion. The fun was over the Irish property their UK resident father left their mother – along with their main UK home – which mummy promptly gifted to them before proceeding to stay alive for 7 years. 2 step? Or just happy coincidence.
3. Your associates in Chambers will have taken steps for the own, er, planning. Any plans to review their returns for us?
Sorry
I am a bit puzzled.
If this was an “equalisation payment” then that implies the others got more
ie They got £500K in the will, and he got £300K + 200K (IC will, then gift from Mother)
Is the some special rationale – or some significance – for this rather than divide the tax free amount equally and then have several gifts?
In hindsight, he probably wishes he had got the simple lump sum, and it was one of his siblings who got the two-step.
The effect would be identical, but it would be one less detail to be discussed as we are doing here…
I believe other sibs got what they got from somewhere else – not in the will.
Jolyon, first of all congratulations on an excellent blog. I don’t always agree with everything you say but it is always interesting and thought provoking. Also the debate BTL seems to be conducted in a courteous manner, which isn’t always the case.
I think the Cameron example illustrates that one man’s legitimate tax planning is another man’s unacceptable tax avoidance. As a tax practitioner myself, I would be comfortable with something like this and would consider it to be pretty mainstream advice that a client would expect to be offered.
On the other hand, I wouldn’t touch any of the packaged avoidance schemes with a barge-pole and actively dissuade my clients from entering into them (partly on ethical grounds but also on the grounds of risk – to myself and the client).
To my mind what differentiates acceptable tax mitigation from unacceptable avoidance is the degree of artificiality involved. Yes, you could argue (as you have), that there was a degree of artificiality in this arrangement but it seems to boil down to IC choosing to leave £300K in his will rather than £500K. I would suggest that this isn’t in the same league as setting up networks of offshore companies that have no apparent commercial purpose or generating artificial “losses” from, to all intents and purposes, fictitious trades or transactions. Some of these schemes seem to me to border on the criminal.
Quite often, tax “planning” or “mitigation” really is just exercising a choice – e.g. do I take a salary or dividends?, do I buy this expensive machine this year or next to maximise capital allowances?
There surely must be some leeway to do this otherwise we may as well just say that everybody is under a duty to pay as much tax as possible.
I would be interested to know how you approach this whole question in your professional life as a tax QC and how you balance your duty to your client with your own ethical stance. If, for instance, Cameron snr. had come to you suggesting the above and asking if it would be effective for IHT purposes (and you felt it would but had misgivings about the propriety of it) what would you have advised? (This is a genuine question btw, not an attempt to have a dig at you!)
In haste my moral involvement tackled here https://waitingfortax.com/2015/05/01/tax-avoidance-and-me/
Thanks, I hadn’t got that far back in the archive!
Didn’t the other children acquire the Cameron family’s UK property interests? Not in 2010 under Ian Cemron’s will, perhaps, but in the seven years before his death. http://www.telegraph.co.uk/news/politics/david-cameron/9218119/David-Camerons-inherited-family-wealth-based-in-foreign-tax-havens.html
If so, the value of the estate overall would have been above the nil rate threshold.
That said, Ian Cameron leaving assets to his wife, and then she taking an independent decision to make a gift to her children, would clearly mean less inheritance tax being payable overall (assuming she survives for seven years).
Whether or not that is avoidance, and whether or not it is acceptable, is left as an exercise for the reader.
Personally, I can’t see what all the fuss is about. Parliament has deliberately legislated for PETs and the like.
The rationale for PETS and the like is to incentivise wealth holders to put their otherwise ossified wealth into circulation so that the young and the general economy benefits. Otherwise wealth remains inactive to no one’s advantage, until the grim reaper visits the wealth holder.
What the government is effectively saying to wealth holders via PETs is “spread your wealth about a bit and we will give you a tax break”. This seems to me to be sound policy. It is not obvious that wealth holders responding to this incentive are “tax avoiders”, even if they make calculations to divvy up their estate so their kids inherit equal amounts. Policies presume tax payers are rational, after all, (or at least policies should presume that).
On another point, would not an Accessions tax overcome many of the problems arising from the current IHT regime which taxes estates? Computing inheritance tax liabilties according to the recipients’ circumstances, rather than on the value of the bequeathed estate, would further incentive downward transmission of wealth. This should be more equitable and guarantee socially desirable outcomes.
I hope Labour’s review of the UK’s tax system will at least consider this option.
You’re getting a bit too close to “Evil Tory = tax avoidance”, Jolyon. Calm down, dear!
I think the mother got the life interest in the house, and when she dies, it goes to the daughters: http://www.theguardian.com/politics/interactive/2012/apr/20/ian-cameron-will. Which means that there’s no immediate IHT hit on the value of the house, due to the spousal exemption. It appears that the daughters were already given an interest in the house (“when added to their existing beneficial interests in the Property”). That Ian Cameron thought about minimising inheritance tax is no big surprise.
My take:
1. To say that this is tax avoidance is pushing the definition too far. The counterfactual for me is David Cameron and his mother entering into a tax-inefficient deed of variation (oh yes!) to increase his inheritance rather than assuming the deceased Ian Cameron had done so. But to say that not deliberately taking that higher-tax route means that making the PET as clearly envisaged under IHTA (which could well be unsuccessful) can meaningfully be regarded as tax avoidance doesn’t really help us in the debate. It’s tax planning, no more.
2. That said, I’d really rather that a wealthy sitting Prime Minister, in the years following a terrible recession, had risen above taking advantage of entirely legitimate tax planning that is not generally available to most of the population. I wish he’d thought “you know, this is ridiculous, if only I were in a position to do make things better – hang on a minute”. He appears to be aware of some of the absurdities in the tax system, by reason of the fact that he over-declared income for tax purposes at times to get a “fairer” result. Whatever our views on the rights and wrongs of having an inheritance tax, I think most tax professionals would agree that it’s a terrible tax in both design and practical effect.
3. I wonder how badly this will play out for Cameron. Given that (inexplicably) a majority of people, even those who will never suffer IHT, seem to loathe it (https://yougov.co.uk/news/2015/01/07/public-attitudes-inheritance-tax/), and given it’s no surprise that Cameron is rich, it seems quite possible that it won’t hurt him. He might even get a bounce in his personal ratings. The IHT planning revelation may not be the PR disaster it currently appears to be.
“It is legal” they say.
Who makes the law? the rich!
For whom these laws are created? the rich
The rich look after the rich, they make sure the back door is never locked.
Since the crusades, the rich always made sure that they will always be two set of laws, one specific for them and the rest will always pay, no matter how poor they are, they’ll always find a way to make the poor pay. why? because we are not in democracy, we are in oligarchy, a minority of people elected by us, who suppose to make laws for us instead they make laws for them, their family, their friends, their party, their lobbyistes and declare that is democracy.
I assume that Mrs Cameron senior doesn’t need the money and decided to give it to her children. You seem to be saying she ought to have held on to money she didn’t need just so her estate could pay more tax when she died and the fact that she didn’t do so is morally dubious.
That’s quite bizarre.
As remarked earlier, your starting point seems to be Cameron = Tory = ‘bad’ tax planning, Milliband = Labour = ‘good’ tax planning.
If the minimum investment in Blairmore Holdings was $100,000, how come Mr Cameron declared proceeds on sale of about £30,000 including gains of about £20,000?
While I admire Jolyon’s agility as an advocate, I am struggling to see the distinction between the Cameron planning and the Miliband scenario. Both strike me as careful tax planning …..or avoidance if you will…..of a kind not available to ordinary voters. I am also sceptical that the gift from mother to son in Cameron’s case was “independent” of the terms of his late father’s will: someone seems to have thought quite carefully about the relevant tax thresholds and the successive steps fitted rather neatly within them.
The difference is that Cameron got more than the nil rate band free of inheritance tax from his father’s estate and Miliband did not. Not sure you need much agility to make that point.
That’s a wafer-thin distinction bearing in mind that Ralph Miliband’s will apparently gave all his assets to his widow; the then rules did not allow a surviving spouse to double up on the nil rate band; and the variation of the will was an artificial step inserted solely to circumvent those rules.
I disagree. The very purpose of the statutory provision allowing post death DOVs was to enable the first spouse’s NRB to be utilised. This arrangement doesn’t utilise it, it extends it.
But she could have gifted the money to anyone with the same effect. My question would be – why hasn’t she skipped a generation and benefited the grandchildren?
The key thing is that it is Ian’s money. That’s what makes it anti-purposive.
Tony: the 2006 prospectus says a minimum of US$100,000, or such lesser amount as the Directors may in any particular case determine.
It’s not Ian’s money anymore. Ian’s dead. He left the money to his wife.
Was there a letter of wishes? Even if there was, this is really tame. I think you are denying Mrs Cameron senior agency in saying it was Ian’s money gifted. Clearly even if she felt a moral duty to make an equalisation gift, maybe backed up by a letter of wishes, she had every legal right to keep the money.
The more meaningful hint you seem to be making is that Ian C might have got assets to the other children outside of IHT, but treated David differently because of his need to have clean hands in his tax and financial affairs. Well maybe so, business assets pass IHT free, or maybe there was something more nefarious.
Was the rule allowing deeds of variation to be written back into the will was introduced to allow use of the nil rate band? It came into force under estate duty where there was only a £15k spouse exemption.
Jolyon: Instead of focusing on the gifts: What about the exemption ‘gifts out of income’ provided it doesnt effect your standard of living and you can demonstrate it comes out of income. The high high earners can literally ‘gift’ up to ‘ANY’ amount and is immediately exempt forget the 7 years.rule for gifts out of capital
Plus the IHT rate is far to high by international standards. Plus many even non tax haven countries dont have this tax. To me it seems: Other countries the rich don’t pay this or middle class types, this country the rich don’t pay or very little but the middle class types do at great cost.
“Tax avoidance” as a term covers a spectrum of behaviour, from claiming your personal allowance to supplying services through a company (Paxman), via selling an investment though an offshore company to save stamp duty (the Guardian) all the way to a deed of variation to avoid IHT (Miliband).
The fact that people are pretending to be shocked by parental gifts cheapens the debate. If what Cameron’s mother did was unacceptable then it would have been legislated against years ago. The Treasury is perfectly happy that people are doing this and Cameron should not be ashamed of it.
There’s lots of good stuff in the Panama papers – can we talk about that please instead of the manufactured hysteria?
@everblue
Benefiting from a tax break granted by government is not tax avoidance. Tax breaks are intended by the government to influence behaviour so that the taxpayer’s actions align with government policy. Tax breaks are meant to incentive certain behaviours that the government of the day deems socially desirable.For example, tax-free ISAs are designed to incentivise people to save. The tax-free aloowance is meant to encourage people to take up paid employment, and so on.
Tax avoidance, on the other hand, is behaviour that simply aims to reduce a tax payer’s tax liability. It is behavour for which the government has provided no explicit incentive and usually requires a great deal of effort and cost to achieve (unlike for a tax break). Because of the significant costs of tax avoidance initiatives, it is only the wealthy that can engage in them.
Conflating tax breaks with tax avoidance suits those who approve of, and / or engage in tax avoidance. It legitimises very ugly behaviour.
Quite, everblue650. Why are we focusing on the minutiae of ministers’ tax returns (the rent they receive, their bank interest, the few thousands of pounds they make or lose on small packets of shares) and the investment and probate decisions made by UK politicians’ parents, when we could be talking about a number of unpleasant people from an number of unhappy countries hiding huge sums of ill gotten gains?
Why should there be a spousal exemption to IHT at all? In this case it just seems to have created a loophole whereby Cameron got his inheritance partly in the conventional way but with an additional £200k untaxed thanks to his mother’s gift. IHT does not hit the poor and spouses are unlikely to be left on the bread line.
@theuxbridgegraduate
I have never heard the term “tax breaks” before in a professional context. Which of the four examples I discussed would you consider tax breaks and which tax avoidance?
Would you say that operating through a personal service company is a tax break or tax avoidance? Certainly it is something I have seen undertaken by people who are not wealthy – so as you seem to think that avoidance is perpetrated only by the wealth I infer you believe it is a “break”?
Anna, a lot of widowed spouses, like my mother, receive a pension that is enough to live on and have little or no other savings. They live in the house that has been their home for many years (approaching 60 years in my mother’s case) the value of which alone puts them into the IHT net. No doubt to force such people to sell up and move away from their secure environment has social advantages (quid pro quo for the bedroom tax; the poor unhappy dears will die prematurely and nor block scarce NHS beds) but perhaps you haven’t thought this through?
IHT has become a tax on the middle classes and that has political repercussions.
The tax avoider if there is one is Mrs Cameron (David’s Mother). She reduced her estate by a lifetime gift. I’m assuming the tax law then applies as intended and no IHT is payable provided Mrs C lives for 7 years. The law provides for this on a straight reading. If this is tax avoidance then what are ISAs,pensions etc. I think you’re showing your colours on this one Jolyon.
I’ve explained why I think it’s different from a straightforward PET in my piece. And I don’t say that the avoider is Cameron. I think you need to read a little more carefully, with respect.
@Paul Hale. There could be an income threshold beneath which it does not apply?
@everblue650
The term “tax break” is an informal reference to “tax relief”. I use it because it is more inclusive.
As you will know, companies face different tax regimes to sole traders. By choosing to incorporate a tax payer subjects their affairs to company taxation requirements as well as to the requirements of personal taxation. The perceived tax advantage of incorporation, should it be realised, is not the sole reason to incorporate and trade through a company. In any case, I may be wrong, but is not IR35 still in force?
To answer your question, if a taxpayer’s sole aim is to reduce their tax liability by taking advantage of reliefs not ordinarily available, or not intended to be ordinarily available for a particular income source or transaction, then it’s tax avoidance.
To assist with clarification, It’s unlikely that a rational saver would put their money in a tax-free ISA just to avoid tax. They would have to be peculiarly motivated (by libertarianism, perhaps?) if their sole intent was to deprive the tax authority this way A rational saver would deposit their savings where the post-tax return is highest. A tax-free ISA may or may not achieve this.
I stand by my point. A tax payer responding to government incentives which seek to influence behaviour in socially desirable ways is not tax avoidance, even when those incentives consist of tax breaks (reliefs).
Some foolish questions: am I right in thinking that –
1) Ian Cameron left everything to his wife, with the exception of £300k, which went to David;
2) Ian’s wife then gave £500k to each of her children, but only £200k to David, because he’d already had £300k directly through Ian’s will;
3) The reason why only £300k was given to any of the children in the will is because that’s just below the threshold where inheritance tax kicks in for anyone other than the spouse;
4) The reason David was chosen as the sole recipient of this £300k is presumably because he’s the eldest child?
Thanks for any clarification.
You are correct that IR35 is in force. I have never seen it applied in practice and I have been working in tax for 15 years.
I can also advise you that tax is the sole reason that a large number of people incorporate.
Jolyon, you are coming very close to suggesting that only by paying the maximum amount of tax are you not doing something reprehensible. There is no doubt that tax has potentially been ‘avoided’. Perhaps it is the word ‘avoided’ and the public’s connotations that go with that assertion. We have a number of circumstances within tax behaviour:
evasion;
avoidance that fails because of the fact pattern (didnt do what they said they did);
avoidance that fails because the law was misinterpreted;
avoidance schemes that work;
organisation of one’s affairs to ensure a lower tax outcome;
statutory arrangements
(there are overlaps here, and there may also be other sub headings as well)
From the facts as portrayed, this seems to fit within the penultimate heading. We could all think of others, as contributors have done above (limited company vs sole trader; decision on when to realise gains; decisions on when or if to take dividends from a close company); claiming the remittance basis.
But other structures or events – transferring ownership of an asset prior to sale; a married couple choosing which makes gift aid donations; taking a loan from a company and paying the s455 charge and tax on the BIK – are these the wrong side of the line?
Does it help anyone to say that tax has been ‘avoided’?
I don’t think, with respect Laurence, that that quite does justice to my post. It’s the two step – the use of the nil rate band and its topping up of money from father’s estate – that moves it from pro purposive to something more tendentious, imo.
The counterfactual is one step – direct gift from Ian to David in a will.
Take one of my examples – transfer of an asset between spouses prior to sale. That takes a counterfactual of one step (sale by spouse A) into two (transfer and sale).
Is that wrong using your analysis?
On that counterfactual there has been tax avoidance. And that’s my point.
I understand – but what’s the point of your point?
Is it that this sort of thing is reprehensible (and so would be the transfer of assets pre-sale)?
Is it that even these relatively straightforward planning steps are ‘avoidance’ and we should be careful when we use ‘avoidance’?
Or something else?
That’s my next blog post!
So, in your view, would it still have been “avoidance” if the entire estate had been left to Mrs Cameron, and then at some later point she had taken the independent decision to make some lifetime gifts? (That is, still two steps, but not the two naughty steps you identify, as the nil rate band was not claimed.)
How long does Mrs Cameron have to wait before deciding that she has enough assets for her own foreseeable needs, and can safely pass some of them on to her children or remoter heirs?
Assuming that Mrs Cameron did give £500,000 to each of the other children in 2010, do those gifts also involve tax avoidance, in your view? (The counterfactual would be a direct payment from Ian Cameron’s estate.)
It seems to me that we have the use of three inheritance tax reliefs in a pro-purposive manner here – the nil rate band is intended to free part of the estate from inheritance tax; gifts to the spouse are exempt from tax so the spouse retains the marital estate, which will fall into tax anyway on the spouse’s death (and these days the unused nil rate band will be transferred across too); and PETs are intended to encourage earlier gifts down the generations so capital can be put to better use?
What is the remedy? Abolish the nil rate band? Tax gifts to the spouse? Abolish PETs? Or, on general anti-avoidance principles, treating gifts by the spouse as having been made out of the deceased’s estate?
Incidentally, the fuss here is reheated from reports in the newspapers in 2010 when probate was granted – for example, a story in the Mirror on 31 December 2010, entitled “Cam’s big tax break … Millionaire spared paying duty on £300,000 bequest”.
(As I understand it from that report, Alex Cameron bought the family house in Berkshire for £2.5m in 2006, so that deals with the possibility of a lifetime gift, but then the total estate in the UK was just £2.7m four years later … one pruriently wonders what the non-UK assets might have been, but that is a private matter, and it seems they were all left to the spouse anyway.)