You don’t have to lie or do anything illegal to reduce your tax bill in the UK. We don’t advocate for any illegal activity here. Please note that there is a difference between avoiding and evading tax. The latter is illegal. Furthermore, there are some tax incentives you can utilise legally to save a lot of money with little to no effort. Here’s what you need to know;
1. Borrow tax-efficiently
This isn’t exactly a tax loophole. It’s more of an obvious but commonly overlooked tax saving tip. You can save a lot of money on taxes in the UK if you borrow wisely. Anyone who has buy-to-let property is eligible for tax relief on their mortgage interest. It, therefore, makes more sense to borrow and buy property for rental purposes than to use the money to reduce the total mortgage amount since you aren’t eligible for any tax relief in such instances. Furthermore, it is possible to borrow more when you start getting rental income and in such cases, you can use the money to buy more property for rental purposes.
2. Invest tax-efficiently
You can also maximise tax benefits by investing wisely. It’s worth noting that you get a huge tax relief by investing in Enterprise Investment Schemes or Venture Capital Trusts in the UK since both investments are aimed at encouraging private investment in small to medium-sized companies. Buying shares of qualified companies under Enterprise Investment Scheme rules qualifies you for a 20% tax reduction on your personal tax bill, and you get to enjoy other tax benefits such as relief from inheritance and capital gains tax. Investing through a Venture Capital Trust qualifies you for a 30% tax reduction on your personal tax bill, and you can invest up to £200,000. Instead of investing typically, you should really consider Enterprise Investment Schemes and/or Venture Capital Trusts. In case the investments don’t do well, the tax benefits usually cushion investors against investment risks.
3. Consider going offshore
It’s worth noting that there are very little advantages for UK citizens using offshore regions like Luxembourg, Liechtenstein etc. for purposes of avoiding tax. UK taxpayers are required by law to declare all their worldwide earnings including interest income earned on money deposited in overseas bank accounts. Nevertheless, there are still overseas tax loopholes to exploit. For instance, some offshore bonds still offer benefits to higher-rate taxpayers because they allow a person to defer tax. Offshore bonds are however complex products that should be used by individuals who are fully aware of their tax benefits.
4. Claim all allowances
You can also reduce your tax liability legally in the UK if you are self-employed. For instance, you can claim costs associated with running your business from home i.e. lighting, heating, property insurance, repairs as well as mortgage interests to reduce your overall tax bill. Such costs can be deducted from your overall profits. However, you may be required to pay capital gains charges that may be applicable when such a premises is sold even if you only used a single room in your home to conduct business.
5. Avoid confronting the taxman on an individual basis if you are married
There are plenty of tax allowances and reliefs in the UK offered to civil partners and married couples. These allowances and reliefs can reduce your tax bill significantly if you take the time to arrange your finances accordingly. This loophole works best when one partner pays a lower tax rate. You can switch income generating assets like investment funds, shares, jointly owned property, etc. to a partner who pays less tax. In such a case, you are only liable to paying tax on rent, dividends, and savings interest. This loophole is completely legal and effective provided you are married.
You don’t have to pay more tax than you should. You don’t have to evade tax either. There are legal alternatives for reducing your taxes in the UK. You just need to get informed. Luckily, the above information will help you enjoy some significant tax savings legally.