Tax mitigation is a way of ensuring that your tax affairs are properly structured so that you don’t pay any more tax than you should. In the UK there are a number of methods which allow you to legitimately do this, and a range of allowances available to help reduce or even eliminate your tax bill.
Defining tax mitigation
Tax mitigation is a legitimate method of safeguarding your tax position – and reducing your tax bill. There are lots of ways to achieve tax mitigation through the use of financial schemes including pensions, Inheritance Tax and succession planning, Capital Gains Tax allowances and so on.
Are tax mitigation and tax avoidance the same thing?
Tax mitigation and tax avoidance are terms which have different meanings. Tax mitigation is an acceptable practice to help reduce your tax bill. Tax avoidance tends to involve the use of specific loopholes in the law, such as tax havens or tax shelters to help reduce your tax bill. As a result tax avoidance is likely to be viewed much more negatively, given its association to exploit the tax system for personal gain.
Tax mitigation vs tax evasion
Tax evasion usually refers to dishonest or illegal arrangements, where the amount of tax which is due in a particular country isn’t paid either in full or in part. This can take different forms but tends to involve funds or information being deliberately hidden from the relevant tax authority.
As a result, any tax liability is reduced using fraudulent practices. In recent years many tax jurisdictions, including the UK, have taken significant steps to share information to help combat tax evasion. Much of the focus by the UK tax authorities has been on buy-to-let property purchased by overseas investors who have failed to declare rental income. HMRC also uses data from tax authorities in other countries who collectively use the Common Reporting Standard (CRS) to gather information.
Understanding tax mitigation
When considering a tax mitigation plan it can be useful to take into account some of the ways in which tax can be legitimately reduced. This might involve working out which of the UK taxes apply to you based on your own residence and domicile status, and how allowances and exemptions might apply.
This could using the Capital Gains and Inheritance Tax systems to protect your estate for the benefit of your loved ones. It can also be important to consider how tax-efficient investment wrappers can be used to help ensure your investments work as hard as they can.
Types of tax mitigation:
There are a number of ways in which you can legally mitigate your tax bill including:
Use of allowances
A good place to start is to check that all family members are using all of their available tax allowances each and every year.
Structure the ownership of investments to make use of lower rate tax bands
It’s sensible for any assets which produce income and gains to be owned in such a way that any positive returns take place in the hands of family members who pay tax at the lower rates. For example, if one spouse is a high earner and the other spouse does not have any income, perhaps consider structuring any investment portfolio so that investment income and gains occur in the hands of the spouse who has the available tax allowances and lower rate tax bands.
Select tax efficient investments and structures
There are investments that produce income and gains which are taxed at lower rates or which may actually be free of UK tax. In addition it may be possible to hold investments inside structures and wrappers which offer protection from UK tax for those investments.
Saving for retirement offers a couple of ways to reduce your tax bill. Firstly, any pension contributions you make will be free of income tax. And you can also reduce your taxable income with pension contributions too if your employer offers a salary sacrifice scheme.
If you are an employee you may also be able to reduce your tax bill by claiming relief on any expenses which you incur as a direct result of your job. This might include specialist clothing, professional fees and subscriptions, travel and subsistence or the additional costs of working from home.
Do remember that if your employer reimburses you, then you won’t be able to claim tax relief.
Mitigate your taxes with The Fry Group Singapore
We’ve been working with clients to mitigate tax for more than 120 years. Our highly skilled team, many of whom have worked for HMRC, have excellent experience in dealing with all aspects of tax. We take time to understand the latest changes in tax legislation to ensure that clients have access to up-to-date, intelligent and effective tax planning.
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