If you’re a high-net-worth individual, you can employ several different strategies to reduce your tax bill and preserve your wealth. However, some of them aren’t exactly simple, so we’ll introduce you to some of the main concepts and tax advantages. Shall we get started?
ISAs
Perhaps one of the most well-known tax-efficiency strategies is saving with ISAs, investment vehicles that protect any income generated from income and capital gains tax (CGT). You can invest up to £20,000 per tax year, so you might want to make sure you make the most of your allowance by April.
You have a number of choices when it comes to what kind of ISA to open. For example, you can invest in a cash ISA or a stocks and shares ISA, the latter coming with more risk as you’re opening your investments up to the stock market. In some cases, you may prefer to pay into an innovative finance ISA or a lifetime ISA. Alternatively, you could open a combination of the four.
Pensions
Paying into your pension pot is another great way to optimise your tax position. While the money you save for your pension can only be used in later life, it can help fund a more comfortable retirement. But how is it tax efficient?
The Government wants us to save for the future, so it gives tax relief to entice us to do that – but only up to a point.
The maximum amount you can contribute and benefit from income tax relief in a year is either £3,600 or your relevant UK earnings, whichever is bigger. However, contributions that take your yearly total above £60,000 won’t qualify for tax relief.
What does this mean? In essence, it means that if you’re a higher-rate taxpayer, you can get up to 40% tax relief, meaning a £10,000 pension payment could cost you just £6,000.
However, you need to be careful if you have an ‘adjusted income’ exceeding £260,000 a year. This is because your annual allowance is reduced by £1 for every £2 of excess income. The maximum reduction is £50,000, resulting in a minimum annual allowance of £10,000.
Your adjusted income includes all taxable income such as your:
- salary
- bonus
- pensions income
- dividends
- interest on savings.
Investment incentives
Many high-net-worth individuals may be able to attract significant tax benefits by investing in Government initiatives such as venture capital trusts (VCTs), the enterprise investment scheme (EIS) or the deed enterprise investment scheme (SEIS).
These Government-backed schemes offer incentives in the form of income tax relief, CGT deferral and loss relief to persuade high-net-worth individuals to invest.
However, these types of investments are often high-risk, so you should only ever go through with one once you’ve spoken with a financial adviser.
Family investment companies
For ultra-high-net-worth individuals, setting up a family investment company may be appropriate. These are private investment companies usually created as part of a family succession plan. The purpose of these entities is to protect investments for the family.
Of course, if your investments turn a profit, you’ll be liable to pay corporation tax between 19% and 25%, depending on how much income you’ve made.
Talk to the professionals
There are plenty of other ways to become more tax-efficient, but the methods are so detailed that it’s always better to speak to someone directly about them. Together, we’ll be able to make a tax strategy that truly works for you. So what are you waiting for?
Get in touch with us today to discuss your tax advantages.