More tax-avoidance loopholes for the ultra-wealthy may provide a boost for Brit-Art manufacturing

“The hands of a healer”, those blessed appendages of gifted individuals whose mere touch can make all sorts of maladies simply go away. Brit-Artists have joined the saints, gurus and fakirs. The malady our arty countrymen can cure by the application of their hands is tax flu. Like alchemists turning lead into gold, they can turn rubbish into multimillion pound objets d'art of tax dodging.

As Britain gradually slips back to “Victorian levels of inequality”, loopholes are being opened for the wealthy to avoid tax by exercising their gracious patronage. It is not from benevolence, but for tax avoidance that they can making donations to charities, the nation, and to eager entrepreneurs looking for startup investment. And, as a welcome relief from the usual government policy of taking from the poor to give to the rich, some of these tax changes take from the rich to give to the extremely rich.

Make no mistake, in spite of their protests the wealthy have been very well served by our tax system. This is evident from the graph produced by the IFS, showing that tax on the wealthy has been slashed by nearly 40% between 1978 and 2011.

It is not just the income tax burden that has been lifted from the rich. Other taxes the rest of us pay have been waived through circuitous bypasses. The Daily Telegraph reported that a third of houses sold for more than £1m dodge paying stamp duty, costing £1billion in lost taxes (i.e. saving the wealthy £1billion in taxes). This wheeze is pulled off by placing ownership of the house into a company. Instead of selling the house, paying 5% stamp duty on the property transfer, you sell the company and pay just 0.5% stamp duty on the equity transfer. And for an annual fee of £30,000, the government sells around 5,400 non-doms the right to avoid tax on overseas income that the rest of us have to pay. These 5,400 each paid an average £1million in tax on their UK income according to the Treasury, a tantalising reflection of the amount they manage to avoid by paying what is to them a paltry £30k protection money to the treasury. All strictly legally.

However, in this time of national crisis, when every tax-pound goes to digging the nation out of its mire of debt, our taxmen have striven to shave back the tax-avoidance privileges from the merely wealthy to benefit only the extraordinarily wealthy.

Up until the 2011-12 tax years, individuals were allowed to contribute up to £255,000 per year to their pensions tax free. From 2011-12 this limit was brought down to £50,000 per year – which is still more than most contribute in a lifetime. However, a new loophole to provide solace for the extra-rich opened up in the Chancellor’s Autumn Statement last month:

“To encourage investment in new start-up companies the Government will launch a new Seed Enterprise Investment Scheme (SEIS) from April 2012, offering 50 per cent income tax relief on investments, and will offer a capital gains tax exemption on gains realised in 2012-13 and then invested through SEIS in the same year”

This tax relief of up to 78% including the Capital Gains Tax (CGT) exemption was described by the Financial Times newspaper as “astonishing” and is only useful to the sort of people who could appear as investors on Dragons Den. Revenue lost through this loophole is being paid for by freezing the capital gains threshold at £10,600, a tax only paid by the wealthier among us. A transfer from those who are wealthy to those who are extremely wealthy, instead of the usual taking from the poor to support the rich as is happening with pensions and benefits.

Charitable donations are also being rewarded by the taxman. A new 10% off inheritance tax offer has opened up for those who leave 10% of their estates to charity. And a further new loophole allows collectors to donate “objects” to offset their inheritance tax, income tax, and corporation tax. Of course, these "objects" can't be the odd looking teapot you found in your granny's loft. They have to be "pre-eminent objects", so don't bother heading down to the Antiques Roadshow to see what you can save.

In the words of the anonymous poet, “Great gifts are guiles, they expect gifts again”. The most guileful gifts are the ones that are inestimable and invaluable. And that is where our Brit-Artists come in. Art is worth as much as someone will pay for it. Tracey Emin, one of that ilk, sold her unmade bed for £150,000 on the basis that it is art. Brit-Art, from glasses of water to a light being switched on and off, are nothing if not of incalculable value.

A high-roller wanting to combine these astonishing tax breaks could do it thus:

Phase 1: invest in a Seed Enterprise Investment Scheme

• Spend £250,000 setting up a new company
• The company invests in hundreds of beds, and invites Tracey Emin to jump on the beds, totally messing them up. Value estimated around £150,000 a piece.
• The company flips a few quid at the local street sweepers in return for the road-kill they pickup, and invites Damien Hirst to stuff them. Hirst’s earlier efforts in taxidermy have sold for £millions
• The company invests in some stationery, and invites Martin Creed to reprise some of his signature works: a piece of paper crumpled into a ball; a chunk of blue-tac pressed against a wall. Creed’s work is on sale for thousands.

Phase 2: donate “objects” to the nation and to charities

From the products of this company, the wealthy investor can harvest his share of ‘art’ of inestimable value. Let’s say our investor is worth £50 million. At his demise, his estate would be liable for inheritance tax at 40% on the value above the £325,000 IHT allowance – a tax bill close to £20million. To cover this, the executors of our investor would have to turn up for a meeting with HMRC with:

This is not as unlikely as it sounds. Dave “I know nothing” Hartnett, the senior civil servant in charge of tax, wrote off £millions of penalties on Goldman Sachs over supper inspite of claiming that he knew nothing about Goldman tax affairs (video of Hartnett's discomfort at being called a liar by a committee of MPs is well worth watching - it takes a while, so bring snacks). Ignorance is no bar to writing off tax at HMRC. Ignorant taxmen and their appointees, over a good supper, could view the art and allocate it a value with a handshake.

We must not blame the ultra-wealthy who make use of these loopholes. It is difficult to disagree with Lord Clyde, a Scottish judge, who said in 1929:

"No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel in his stores. The Inland Revenue is not slow, and quite rightly, to take every advantage which is open to it under the Taxing Statutes for the purposes of depleting the taxpayer's pocket. And the taxpayer is in like manner entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue"

Those who obey the law should not be easily sanctioned. It is the law that is made an ass by the donkeys in the Treasury who draft it and the mules in HMRC who enforce it.