How to Avoid Tax (Legitimately)

Most people are willing to accept the argument that without taxation the world would be a much worse place because we wouldn’t be able to afford the essential public services such as education and healthcare.  However, there is nothing to say that any of us has any obligation to overpay our taxation obligation – in fact, if you want to donate any extra money, do it to charitable causes of your choosing.

In this article we’re going to examine ways in which expatriates can avoid certain taxation entirely legitimately.  We’re not suggesting you start laundering money, rather we’re going to draw your attention to hidden taxes and show you ways you can perhaps reduce your overall annual tax burden by making use of annual tax allowances.

The information imparted herein is generic – it may not apply to you and your personal circumstances at the current time, so if in doubt, speak to your accountant or a financial adviser to find ways in which you can manage your money most effectively.  The following tips should at least give you a starting point for thinking about ways in which you can perhaps save money.

Avoiding Capital Gains Tax

As you’re probably aware, in the UK you’re liable for capital gains tax when you sell certain assets and realise a profit from the sale.  The tax is not applied if you sell your main residence and you do have an annual exemption.  You can also gift assets to your spouse for example, and in so doing also make use of their annual tax exemption allowance.  So, if you have UK based assets to sell, look carefully at when you sell them in a tax year and how much profit you will realise.  Perhaps with careful planning you can offset any losses you have made against the gain, perhaps you can also sell assets across multiple tax years and thereby make use of your allowance and perhaps even your spouse’s too.

It’s also well worth knowing that as an expatriate who is living abroad and no longer a tax resident in the UK you may not be liable for UK CGT at all depending on how long you have been living abroad for and also, in some cases, whether there is a double taxation agreement in place between your new nation of residence.  It is well worth looking into this entire situation carefully before you dispose of any assets that may realise a gain, because if you can legitimately avoid paying CGT, so much the better.

Now a word of warning for those living abroad or who live in the UK but who have assets abroad such as a property – remember that CGT is not a tax exclusive to the UK.  Many nations have their very own version of it, so you must understand the new tax rules in your chosen country as well!

Can You Avoid Income Tax?

Income tax was only introduced in the UK in 1799 – and then only as a temporary tax.  You never know, this may mean that one day the government decides it no longer needs to collect it!  But until then, are there ways you can avoid paying income tax?  Well, yes and no!  If you’re UK resident you can make use of a pension as a way to reduce your taxable income as pension contributions attract tax relief at your highest rate.  You should also look at ISAs as a way of reducing tax on interest earned by you.  However, if you’re an expat living abroad you will not necessarily be able to benefit from either option…but the good news is, you may be able to make use of the taxation saving benefits of offshore saving, investing and even banking.

You need to look at your entire financial situation with the help of an independent financial adviser to see if there are ways you can save tax by going offshore, or at least benefit from greater compound interest earned thanks to taxation deferral.

Inheritance Tax Dodge

Inheritance tax is the most unfair tax of all – you pay tax all your life, you work hard to build up an estate that consists of perhaps your home and personal belongings, you plan to leave it all to your heirs to help them along in life when you die, and then along comes the tax man to take it all away.  Well, to take up to 40% of it away anyway.  And you know what, moving abroad for even many, many years and being tax resident somewhere other than the UK will probably have no impact on this event occurring at all – this is because the UK tax man looks at your estate based on your country of domicile, not your country of residence.

The good news is that there is a healthy nil-rate band on which no tax is levied – but if your estate is worth over this figure, (£325,000 for the tax year 2009/2010), then 40% of the extra value becomes the tax man’s take.  Transfers between spouses are exempt, and there are all sorts of ways you can legitimately dodge this horrible tax – you can look at making lifetime transfers for example, and perhaps even placing assets in a trust.  Speak to a financial adviser about the best way to go forward to protect your estate, your wishes and your heirs from IHT.