Is tax avoidance always wrong?

David Cameron and his tax affairs will be front page news all week, and we don’t intend to re-hash all of that here. But one thing that came out a day or two ago was really interesting. And it is the amount of money that his dad left him in his Will. It seems to have been exactly £300,000 – just £25,000 under the limit that would have triggered a payment under Inheritance Tax rules.

Shortly thereafter his mother gave him two payments totalling £200,000 to ‘equalise’ the payments that were made by his father to his siblings. Again under IHT rules this payment will be tax-free as long as his mother survives for seven years from the point at which the payment was made. There is a more detailed analysis of these payments by Tax Barrister Jolyon Maugham here

This £200,000 presumably came from David Cameron’s dad’s estate and was money that was initially left to his mother. Had it all gone to David in the first place he would have paid tax on it. So did his dad try to avoid tax, and if he did so was it wrong?

I was involved in a discussion on a BBC phone-in show on Friday where a few of the callers suggested that all tax avoidance was wrong. One caller went as far as to call it ‘morally repugnant’.

It’s a really difficult call. Here are four situations:

1. 80-year-old Mary puts £10,000 in a stocks and shares ISA and doesn’t pay tax on any of the gains she makes.
2. Young graduate believes it’s a good idea to save for the future and puts 1% of his income into a pension arranged by his employer. His employer matches it
3. The Prime Minister takes advantage of legitimate tax avoidance rules to save 40% tax on money left to him by his dad.
4. A multinational company doesn’t pay any tax on its UK profits because it is not ‘based’ in the UK.

Which of these situations are wrong?

Is it wrong for a pensioner to invest in an ISA rather than buying shares in Marks and Spence direct and on which she might have to pay tax if the shares rise in value?

Is it wrong for a your person in his or her first job to take advantage of the rules that allow us to save for our retirement?

Is it wrong for David Cameron’s mother to give her son money, taking a risk that if she dies within seven years he might have to pay up to 40% tax on the cash?

Is it wrong for a large multinational company that generate millions of pounds in profit all over the world to arrange its affairs in such a way that is pays no tax in the UK.

A great deal has been made of the difference between tax avoidance and tax evasion. The first is legal the second is not. But is that too simplistic?

Which of these would you allow, and which would you ban? When is avoiding tax okay, and when is it not?

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