Ed Miliband and the semantics of tax language
Accusations that Ed Miliband has ‘avoided tax’ have been bandied around after the Daily Mail released details that the Miliband family had used a deed of variation to alter the terms of his late father’s will with the intention of reducing the inheritance tax payable.
In our opinion, this is a routine method of tax planning, using the rules as they were intended in order to reduce your tax liability. With election season in full swing, and accusations being thrown around left right and centre, we thought we would clarify a few of the semantics of tax language.
Planning, Avoidance and Evasion
There are three broad categories that are relevant when talking about the legality and ethics of tax.
- Tax planning (legal)
- Tax evasion (illegal)
- Tax avoidance (legal)
We’ll start with the easy one – tax evasion. Tax evasion is the illegal evasion of taxes. A typical example of this would be not declaring your income to the taxman, possibly by putting it in an overseas bank account. However, not everybody with a Swiss bank account is guilty of tax evasion, despite what the headlines may want you to believe.
Tax avoidance however is legal, though typically involves ‘artificial’ structures using the rules in unconventional ways. A good rule of thumb is to decide whether the structure has any commercial basis. There’s been a lot of press in the last year or so of celebrities and other high earners being caught using these schemes, typically involving them claiming substantial losses that could be used to offset their income, and reducing the tax they have to pay (for example Chris Moyles using the ‘Working Wheels partnership’), or other complicated off-shore agreements (such as the ‘Liberty’ scheme used by celebrities such as Gary Barlow, so-called ‘Employee Benefit Trusts’ or contractor loan schemes).
Finally, tax planning is using legitimate and legal methods in the way they were designed, in order to reduce your tax liability. Typically this means utilising your tax-free allowances as much as possible, thinking ahead as to when to dispose of assets, and planning for inheritance.
A variation of a will is a common practice in the realm of tax planning. It enables the correction of any mistakes in the will, as well as potentially reducing future tax liabilities.
Suppose, for example, you have two brothers. On the death of their mother, they each get an equal amount of money (say £20,000), and some antiques – a vase to one (brother A), and a painting to the other (brother B). Now it may be the case that brother A would have preferred the painting, for sentimental reasons. Instead of brother B selling it to A for some amount (which may incur a capital gains tax charge), they can agree themselves to change the terms of the will so that brother B, instead of getting £20,000 + the painting, instead gets £30,000 only, and A receives £10,000 + the vase + the painting.
In the specific case of Ed Miliband, at the time of his father’s death in 1994, the tax-free nil-rate band was £150,000; however you were not entitled to your spouse’s unused nil-rate band on their death (a rule introduced in 2007). If there had been no deed of variation, and as his mother has survived until the rule change, there would have been no tax advantage.
If the whole property had been left to Miliband senior’s wife, then there would have been no inheritance tax payable, however if she had subsequently died and left the property to her sons, there would have been a tax liability arising.
If Ralph Miliband had written the will to this effect prior to his death, then there would have been no issue on the situation.
Ed Balls, the Shadow Chancellor, has spoken out against Ed Miliband’s use of a tax ‘loophole’ to avoid potentially paying inheritance tax, and pledged to look into the deeds of variation used by Mr Miliband. Despite this, he has insisted that “all the tax that was due” has been paid.
In a similar announcement, he suggested that families should seek receipts for every low-cost job carried out by gardeners, cleaners etc, but was caught out when it was revealed that he, and 11 other members of the Shadow Cabinet had made substantial expenses claims without receipts backing the figures up.
To further embarrassment, it has emerged that he has made basic errors in his expenses claims forms, raising the spectre of the 2009 MPs expenses scandal, that many had hoped had been put to bed for good.