Taxation planning tips for high net worth individuals
While there are ways for anybody to minimise the tax they pay, such as ISAs, there are certain allowances that are only worthwhile if you have a greater level of personal wealth. 'High net worth' is a term used in financial services and taxation to designate people whose wealth in either liquid assets or property and investments exceeds a certain threshold. Opinions vary on what this figure should be in the UK, but since 2016, HMRC has used a threshold of £10 million to identify high-net-worth individuals. This sum is calculated to cover financial assets such as stocks and bonds but typically doesn't include the value of your primary residence. There is also a class of 'ultra-high net worth individuals', for whom additional options are open.
A tax minimisation strategy is an important part of your overall financial plan if you aim to retain as much as possible of your personal wealth. The state provides a range of means to lessen the amount of tax you pay. Making the most of these allowances helps you to lower your tax burden while staying within the law.
A pension is essential to guarantee your future financial stability when you decide to take your retirement. It's also a great way to minimise your income tax contributions. Pension contributions are tax-free up to the relevant limit but are then taxed at your marginal rate, so it makes sense to pay up to the prevailing limit in any given tax year. However, some care must be taken in determining the allowance if you have an 'adjusted income' (including salary, bonuses, dividends, and interest) over a given threshold (currently £240,000 per annum). In this case, your allowance is reduced by 50% for all income that exceeds this sum.
ISAs are a useful tax-free allowance for cash and investments, but they are subject to annual saving limits. Once you've maximised your ISA and pension allowances, you have further scope to minimise your high net worth tax liability by saving in a General Investment Account. Unlike ISAs, these are taxable, but you will be able to claim back a level of relief on these accounts each year. These reliefs include the Dividend Allowance and Personal Savings Allowance.
Tax-relieved investments offer further scope for tax planning for high-net-worth individuals. Your choice of investments will depend on your desired level of risk exposure, but there are several options. Qualifying Venture Capital Trusts, Enterprise Investment Schemes and Seed Enterprise Investment Schemes each offer considerable tax savings. However, since there are significant risks involved, you should consider taking financial advice before investing.
Ultra-High Net Worth Considerations
There is no UK benchmark for ‘ultra-high net worth’ individuals. However, in the USA it is generally taken to refer to those with investable assets totalling $30 million or more, so £20-£25m or so in the UK. If you come into this category, it is worth considering setting up a Family Investment Company. The main value of this is in succession planning. It is beneficial in taxation terms since the dividend income is generally tax-free.
Given the range of options for tax planning, it's worth speaking to a high-net-worth tax accountant before committing to your strategy. For more information and a free consultation, please contact Arnold Hill & Co today.
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