{"id":12694,"date":"2023-11-30T16:14:07","date_gmt":"2023-11-30T16:14:07","guid":{"rendered":"https:\/\/www.taxpolicy.org.uk\/?p=12694"},"modified":"2023-12-27T13:41:45","modified_gmt":"2023-12-27T13:41:45","slug":"jail","status":"publish","type":"post","link":"https:\/\/heacham.neidles.com\/2023\/11\/30\/jail\/","title":{"rendered":"When does tax avoidance become a crime?"},"content":{"rendered":"\n
I have an exciting announcement. I’m setting up a tax consultancy called “Less Tax for Investors” and will be selling a brilliant way to escape inheritance tax on your ISA.1<\/a><\/sup>This doesn’t work. None of this works. Do not do this.<\/span> To sign up as a client, please go here<\/a>.<\/p>\n\n\n\n Our structure – which is approved by HMRC2<\/a><\/sup>It isn’t<\/span> – is called the “hybrid partnership structure”. I’ll incorporate a limited liability partnership (LLP) and declare a trust over the ISA in favour of the LLP.3<\/a><\/sup>The LLP has two members: the investor and a new company incorporated by the investor.<\/span>4<\/a><\/sup>Declaring a trust over a ISA is a very bad idea which will cause lots of problems. Do not do this.<\/span> And then, for the low low price of \u00a325k, your ISA portfolio will qualify for business property relief (BPR) from inheritance tax.5<\/a><\/sup>It won’t. No passive investment\/share portfolio will qualify for BPR.<\/span><\/p>\n\n\n\n Your normal accountant won’t have told you about this because they’re not smart enough.<\/p>\n\n\n I’ll go to investor events and run glitzy presentations, telling clients my structure means your ISA:<\/p>\n\n\n \u201cis outside of your estate for inheritance tax, as long as you tick various boxes\u201d<\/em><\/p>\n\n\n Why? Here comes the science bit<\/a>:<\/p>\n\n\n “because the HMRC recognizes that there is a trading relationship between you all, and that you’ve got a written business plan and that you’re managing it and that your sole purpose is not to avoid tax but to maximize your wealth to tax efficiently as possible, the whole thing becomes inheritance tax free.”<\/em><\/p>\n\n\n Sometimes I’ll have a different explanation. But no need to worry, because HMRC agrees with me:<\/p>\n\n\n “The LLP structure that we set up is not investing in shares. It does not own the ISA. The ISA is owned by the individual. The LLP has taken advantage of that ownership and it is available\u2026 after two years, that LLP turns into a trading business according to HMRC, not according to us, according to HMRC. And at that point, after two years, the ISA inside that LLP is then outside of the estate for inheritance tax after two years. “<\/em><\/p>\n\n\n I’ll build a large team around me – accountants, salespeople, more salespeople. They’ll go around marketing my scheme using slides like this:6<\/a><\/sup>The Duke of Westminster<\/em> case hasn’t been good law for decades; any adviser citing it is waving a big banner saying “I don’t understand tax”.<\/span><\/p>\n\n\n\n We’ll be frequently challenged by other advisers on internet forums:<\/p>\n\n\n\n We’ll respond aggressively, but never, ever, reveal why we think our scheme works:<\/p>\n\n\n\n When we receive more formal queries from clients’ existing tax advisers, we’ll give them nonsensical replies to make them go away:<\/p>\n\n\n “<\/em>The LLP holds the equity and not the shares \u2013 so it cannot be classed as <\/i>investment. The owner of the properties will not qualify for BR on the shares, but <\/i>on the equity.<\/i>“<\/em><\/p>\n\n\n I’ve another amazing idea – I’ll get clients to file tax returns on the basis they’re receiving a small amount of trading income through their LLP, and then claim this means HMRC has accepted the BPR position:7<\/a><\/sup>It doesn’t. HMRC is most unlikely to query whether the income is actually trading, but in no sense does that mean they’ve accepted the BPR position.<\/span><\/p>\n\n\n What is true to say though is that we have had correspondence with HMRC where they have agreed that the partnership income received from the LLP is treated as trading income and as such, the clients pay the appropriate Class 2 and Class 4 National Insurance contributions.<\/em><\/p>\n\n\n And:<\/p>\n\n\n “U<\/em>nfortunately, we have had clients die during the time that they have <\/i>been clients and HMRC have accepted all of our probate calculations based on the <\/i>above.<\/i>“<\/em><\/p>\n\n You cannot make an ISA, or anything else, exempt from inheritance tax by holding it through an LLP.8<\/a><\/sup>Bizarrely you absolutely can make your ISA exempt from inheritance tax, by only holding AIM shares that qualify for exemption from business property relief. I am absolutely not recommending you do this, and it’s also not as simple as the previous sentence would suggest.<\/span> <\/p>\n\n\n\n There is no technical basis for thinking this could work. It’s like claiming that you’re exempt from council tax if you paint your door pink. The structure does not work. The explanations are nonsense. <\/p>\n\n\n I can see the future, and it looks something like this:<\/p>\n\n\n\n Can HMRC prosecute me for tax evasion? Or can the CPS prosecute me for defrauding clients?<\/p>\n\n\n\n It’s not a crime to get the law wrong. It’s not even a crime to get it recklessly wrong.9<\/a><\/sup>See R v Godir<\/a><\/em> [2018]<\/span> The question is whether I was dishonest<\/strong>.10<\/a><\/sup>The legal test for “dishonesty” has somewhat changed in recent years, although it’s unclear how much difference the change makes in practice. See this CPS summary.<\/a><\/span> That probably means in practice: did I take a position that either I knew was wrong, or was “wilfully blind<\/a>” to the obvious possibility that it was wrong?<\/p>\n\n\n\n Nobody really<\/strong> knows if I was dishonest except me, and I’m not telling. But judges and juries don’t have to rely on confessions and psychics – they infer dishonesty from surrounding circumstances, and do so all the time. Here those circumstances would be:<\/p>\n\n\n\n Is it reasonable to infer from these facts that I was dishonest? Should I be prosecuted for defrauding HMRC and my own clients?<\/p>\n\n\n The question above is not hypothetical. By a remarkable coincidence, my fictional scheme is very similar to the real scheme marketed by “Less Tax for Landlords”, which recently failed spectacularly<\/a>:<\/p>\n\n\n\n But there’s one important point we don’t know – did the critical line in bold above apply to Less Tax for Landlords? Did they, like hypothetical-me, have no technical basis for the position they took, even a bad one? <\/p>\n\n\n\nMy marketing<\/h2>\n\n\n
<\/figure>\n\n\n\n
<\/figure>\n\n\n\n
<\/figure>\n\n\n\n
Everything above is false<\/strong>. Do not do this, or anything like this.<\/strong><\/h2>\n\n\n
What will happen to Less Tax for Investors?<\/h2>\n\n\n
\n
\n
Less Tax for Landlords<\/h2>\n\n\n
\n