I feel I must take issue with you over your assertion, in response to PD’s communication regarding tax avoidance, that, with reference to pensions and individual savings accounts (Isas): “Few would consider these options to constitute tax avoidance, since they are explicitly permitted by legislation” (MoneyWeek 872).
I have had an Isa for many years and my purpose is to avoid tax. I have no moral qualms about this as I see no reason to pay more tax than I am legally required to do. An Isa is quite clearly a vehicle for tax avoidance and is widely used as such. The fact that it is explicitly permitted by legislation is, in my view, irrelevant.
I have never used a complex tax-avoidance scheme myself, but I have no problem with those that do as long as full disclosure is made to HM Revenue & Customs (HMRC). If it is subsequently decided that the scheme is ineffective then tax will have to be paid and probably a penalty for late payment as well, but no crime has been committed. Tax evasion usually involves some degree of deception such as a false statement or the deliberate failure to declare part of your income, for instance when a tradesman requests payment in cash in order to keep the transaction “off the books”.
I agree with PD that it is important to keep a clear distinction between tax avoidance, which is entirely legal, and tax evasion, which is a crime. If you take the view that an Isa is acceptable while a complex offshore tax scheme is not you then you have to deal with a whole range of possibilities between these two extremes and make a subjective decision on where to draw the line.
MS
The distinction you draw between tax avoidance and tax evasion is the standard rule of thumb that most people have usually employed: in essence that tax evasion is illegal while tax avoidance is legal. It was a useful rule of thumb – but the reality is that in today’s political environment it is no longer very useful.
HMRC is increasingly clamping down on arrangements that would generally be considered to be tax avoidance rather than tax evasion, sometimes with heavy penalities that may far exceed tax due and any penalty for late payment (see the recent cases involving film tax-avoidance schemes, for example).
Most laws involve some degree of subjectivity and that will remain the case with tax schemes (indeed, as the tax code becomes more complex, the scope for this increases).
Yet the example you give between an Isa and a complex offshore tax-avoidance scheme is one of the less subjective: an Isa is explicitly permitted by legislation, while an offshore scheme is typically the consequence of a loophole in the legislation. That ultimately is what matters most: not the morality of an arrangement, but the risk that HMRC comes after users of the arrangement.
Not all retirees are squandering cash
Having read the article by David Prosser on the subject of retirees risking running out of cash (MoneyWeek 875), I thought it might be useful to add that drawing too much out of a pension can in certain circumstances be a perfectly sensible strategy. The article states that almost half of people with drawdown plans are withdrawing 10% and goes on to say that the average pension fund is £118,000.
A retiree drawing £11,800 per year would sensibly use up their personal tax allowance of £11,500 and, allowing for the first 25% of the sum drawn down being tax free, the retiree could draw even more and still pay no income tax. This of course assumes that the retiree has no other taxable income and makes up the rest of their income from dividends or savings which have separate allowances, or better still from investments held in an individual savings account (Isa).
While agreeing with the concerns expressed in David’s article, I would make the distinction that money drawn down from a pension is not necessarily being spent. It could be drawn from the pension to use up the personal tax allowance and re-invested in a stocks and shares Isa, which offer tax-free growth and dividends for up to £20,000 per year.
IW
The statistics on how much people are taking out of their pensions provide no information on what other sources of income savers have or how they are using the money they take. Undoubtedly some of the pensioners who are taking large amounts are doing what you describe. MoneyWeek was largely in favour of the pensions freedom reforms that gave investors more flexibility in how they draw on their pension funds in retirement, for exactly these reasons: everybody’s circumstances are different and what works best for one will not be the ideal option for all.
That said, there’s also no doubt that our pensions system is in poor shape, many people have not and will not put aside enough to fund a comfortable retirement and many of those may be exhausting their funds too quickly – perhaps from necessity rather than choice. The pensions freedom reforms need to be followed with a far wider overhaul of pension provision if we are not to end up with a retirement crisis.
Bitcoin: safe as houses?
Regarding your article “Bricks, mortar and bitcoin” (MoneyWeek 876), I can’t believe that the Land Registry has allowed the sale to be recorded in a cryptocurrency. I have never heard of any purchase of land in the UK being recorded in anything other than sterling, the recognised sovereign currency. I suspect that the stamp duty payable in sterling must be based on an exchange rate of bitcoin to sterling at a certain time, or perhaps HM Revenue & Customs accepts payment in bitcoin!
I’d also be interested to know at what date and time the seller of Bloody Bay, Union Island (on the same page) chose to value the property at 400 bitcoin. On Friday, 22 December, your publication date, for example, 400 bitcoin was equivalent to somewhere between $4,319,200 and $6,322,400 depending on the time of day. You have to wonder how the seller evaluates an offer in bitcoin from a buyer!
MT
The Land Registry allows the purchase price of property in the UK to be recorded in currencies other than sterling. But HMRC won’t accept payment in bitcoin – and its guidelines on the capital gains tax liability for a deal involving bitcoin means that the buyer might not want to buy in bitcoin anyway. This demonstrates the problems that bitcoin faces gaining acceptance as a means of exchange – as does your comment on price volatility. In our view, both these stories are gimmicks – not a sign that bitcoin is becoming mainstream.
Writing to MoneyWeek
MoneyWeek welcomes letters and emails from readers, but unfortunately we are not able to publish or reply to all of them. We may edit letters prior to publication. All responses are for information only and should not be relied upon in making investment decisions.
Our staff are unable to respond to personal investment queries, as MoneyWeek is not authorised to provide individual investment advice. Please email us at editor@moneyweek.com, or write to us at Editor, MoneyWeek, 31-32 Alfred Place, London, WC1E 7DP.