The proposed legislation, to be introduced later this year, will make it a criminal offence for financial companies such as banks, accountants, and law firms if they fail to stop employees from instructing clients on ways of evading tax.
The Conservative leader also revealed that all crown dependencies and overseas territories, bar Guernsey and Anguilla, have committed to providing UK law enforcement authorities with information about beneficial ownership.
In a televised address to the House of Commons on Monday, Cameron said the UK government will use up to £10m ($14.1m, €12.4m) to set up a new cross agency task force to “swiftly analyse” and “take rapid action” on the millions of leaked documents, dubbed the ‘Panama Papers’, which exposed the tax-evasive practices of the rich and powerful around the world.
He said: “Under current legislation it is difficult to prosecute a company that assists with tax evasion, but we are going to change that, so will legislate this year for a new criminal offence to apply to corporations who fail to prevent their representatives from criminally facilitating tax evasion.”
Mounting scrutiny
Cameron also addressed the escalating furore surrounding his family’s tax affairs, defending the £30,000 he made from an offshore fund based in the Bahamas set up by his late father Ian Cameron, as “entirely standard practice” and “not tax avoidance.”
Details of the fund emerged last weekend when his father was named in the Panama Papers – the biggest financial data leak in history – detailing how institutions and individuals around the world set up offshore companies in order to avoid paying tax in their home countries.
The Conservative leader said he had paid all UK income tax on any dividends he earned from the fund and the amount he made from selling the shares fell within his and his wife’s capital gains tax allowance.
Cameron’s £200k PET
Cameron also defended the UK’s inheritance tax (IHT) laws days after the Conservative leader published details of his tax affairs over the last six years since he took office which show he was handed £200,000 ($282,000, €248,000) by his mother via a potentially exempt transfers (PET).
Although any gift made to an individual via a PET is IHT exempt so long as the person gifting the money lives for a further seven years after doing so, the prime minister has faced a barrage of criticism, with several national newspapers accusing him of ‘avoiding’ £80,000 in IHT.
Under the current system, IHT of 40% only applies to estates, including any property, possessions, money, savings and investments, valued over £325,000 – up to that amount is known as the ‘nil rate band’ and is exempt from IHT.
The prime minister described the use of PETs as a “natural human instinct” and something that “people should be encouraged to do”.
Expert views
Experts on International Adviser’s tax and technical panel agree with David Cameron, defending the use of PETs.
Neil Chadwick, a technical manager at RL360°, says: “PETs are a perfectly legal way of transferring assets out of a person’s estate. There are clear and concise rules in the Inheritance Tax legislation to show how this is done correctly and the consequences of the transfer failing, whether it’s to an individual or to another entity such as a trust.”
Meanwhile, Rachael Griffin, a financial planning expert at Old Mutual Wealth, describes PETs as a “legitimate financial planning tool” that “enable people to pass on money they have saved and accumulated over the years”.
She explains that rising property prices are fuelling demand for PETs, as a family home can now often use up most of someone’s nil rate band.
She says: “They are not a tax avoidance vehicle for someone to use on their death bed as they are only exempt from the donor’s estate if they survive seven years from making the gift, if they don’t then there could be Inheritance Tax (IHT) to pay on the gift.”
IHT reforms
The government has proposed reforms to IHT in a bid to reduce the number of people who pay the tax.
Last year, the chancellor George Osborne announced an increase of the nil rate allowance to £1m for married couples when including a home – although HMRC later clarified that couples do not need to own a property to take advantage of the proposed changes due to come into force on 6 April 2017.
The reforms have been slammed by the chairman of the UK’s Treasury Select Committee, Andrew Tyrie, as a “mess of complexity and uncertainty”- warning that the rule changes would not significantly reduce the numbers of estates that pay IHT.
