Remuneration Trusts Offer Legal Loophole To High Earners

The UK has witnessed a host of high-profile cases recently centring around supposed tax avoidance by well-known figures.

One incident that garnered the most column inches concerned comedian Jimmy Carr, but what is interesting about this and the other cases, is they didn't result in any legal prosecution.

The prime reason being all the highlighted celebrities had acted perfectly in line with the law. Yes, they had managed to avoid paying taxes, hence the 'moral' opprobrium heaped upon them by the press, but legally, they hadn't done anything.

This raises the issue about legal tax loopholes which high earning individuals take advantage of, and rather than explore the rightfulness or not of such actions, which becomes, often or not, a political question, it pays to examine what these legal tax planning strategies are.

In the aforementioned case of Jimmy Carr and many other celebrities, their legal tax avoidance comes from utilising remuneration trusts. These can be many and varied but share sufficient commonality to states certain salient points about their operation.

Firstly, remuneration trusts tend to have a threshold of entry in the UK, which typically will be a single payment or income averaging above £100k.

Secondly, and most importantly, is their legality. For two decades, remuneration trusts have been recognised by the UK government body governing taxation - HMRC – and QC legal opinion also vouches for their legal viability. Beyond threshold and legality, they tend to operate with an offshore company invoicing for someone's services creating a tax-free trust environment with significant tax benefits.

The offshore company can invest these fund into UK companies tax-free or indeed loan these funds to private individuals without incurring tax. This helps mitigate taxation for income tax, capital gains tax, inheritance tax or national insurance, and with the fees involved in the creation of such remuneration trusts working out far below what would have been payable in tax, is is any wonder so many high profile figures in the UK continue to make use of them?

Regardless of our own views, if an individual acts within the law, then he is not guilty of criminal tax avoidance, but is indulging is what is tends to be called more euphemistically tax planning or tax mitigation but is in reality legal tax avoidance.

Remuneration trusts offer a convenient loophole for high earners to get their money back into the UK in a tax free manner, helping to protect their wealth. Rather than pillory individuals for doing this, it would make more sense for legislators to acknowledge these loopholes more or close them by changing tax laws. Until then, high earners will continue to exploit tax loopholes to their advantage.