Tax planning strategies must evolve as regulations evolve
In recent years there have been a number of changes to tax regulations
These have created a challenging environment for high net worth individuals (HNWIs) and their tax planning. UK authorities and the HMRC are becoming increasingly aggressive in their efforts to collect taxes from HNWIs, despite evidence that the wealthy are already contributing disproportionately. For example:
- A Freedom of Information request made by journalist Fraser Nelson in 2014 revealed that the top 3,000 earners in the UK pay more tax than the bottom nine million
- 25% of workers in the UK pay 75% of all income taxes collected
If you have worked hard, built businesses, invested diligently, and benefitted by building wealth, the HMRC is coming to get you, and the government will help the taxman grab as much of your wealth as possible. As more tax planning secrets are revealed by the International Consortium of Investigative Journalists – the people responsible for publishing intimate details of 2.5 million HNWIs worldwide in 2013, and more recently for highlighting the Mossack Fonseca debacle – the masses become increasingly aggrieved at the tax ‘injustice’. A government that is seen to crack down on this perceived injustice wins votes.
If you’re a higher rate taxpayer or own a high value of assets, the chances are you are paying more tax than you need to. And if you aren’t paying that tax now, the likelihood is that the HMRC will put its hands in your pockets when you die and steal your wealth from your children and grandchildren.
Tax planning ideas for today’s HNWIs and their families tomorrow
The government has set up a High Net Worth Unit (HNWU) to handle the tax affairs of the richest people in the UK. These people pay around £4 billion in personal income and capital gains tax every year. The HNWU also has a unit specialising in ‘rising stars’: those HNWIs that are likely to fall within the scope of the HNWU in the coming years.
Tax planning has never been more necessary or more complex, though some believe that certain tax mitigation plans can be handled personally without issues. Take IHT planning, for example. One of the key tax planning tools to mitigate ‘death taxes’ is the Will, but, as Mr and Mrs Green found out, even this is more complicated than you might think.
Mr Green became terminally ill, and in order to put his affairs in order he completed a DIY Will. He assured Mrs Green that all was in order, and it wasn’t until he passed away that she discovered it wasn’t so. First, Mr and Mrs Green had never become a married couple – they called themselves Mr and Mrs to avoid embarrassment in the small village in which they lived. So the rules about IHT allowances and the family home went out of the window.
Worse, the Will hadn’t been signed by two independent witnesses, so when it was contested by Mr Green’s son by a previous marriage it was found to be invalid. Despite the son and father having gone twenty years without seeing each other, the son was found to have a legitimate claim on his estranged father’s estate. However, the size of this estate ended up being far smaller than the son had hoped, because Mr Green had failed to put in place diligent IHT and tax planning measures.
Here are seven tax-planning ideas you need to explore and discuss with your wealth manager today, before it becomes too late tomorrow. These could reduce your income tax bill, your capital gains tax liability, and preserve your wealth for future generations:
- Deferred or growth share plans can be organised to only suffer capital gains tax rather than income tax. Maximise the tax relief possible on pension investments, too.
- An Enterprise Investment Scheme (EIS) offers tax relief at 30% on an investment of up to £1 million. A married couple can invest £2 million every year and receive income tax relief. And if the investment is held for three years, then this will be CGT free, too.
Capital Gains Tax
- If you’re a UK resident, then you’ll be liable to CGT on disposal of assets. If you emigrate and become non-resident for five years, then you will avoid UK CGT.
- If you sell a business as a sole trader, business owner, or business partner, you’ll only pay 10% CGT under the entrepreneurs’ relief rules.
- Get advice from a financial advisor and organise your investments to make full use of personal CGT allowances, and ISA allowances; the timing of disposals will also reduce CGT liability.
Inheritance Tax Planning
- Your wealth manager will be able to advise you on the range of initiatives, tools, and techniques that can be used for death tax planning. UK residents benefit from a nil-rate band of £325,000, but IHT mitigation measures could also include maximising business property relief, life insurance, and making gifts (though you’ll need to mind the seven-year rule when you do so).
- Make sure your Will is written professionally, and that you use available and appropriate trust structures.
Tax planning isn’t a one-time event. It needs to be constantly reviewed to comply with evolving laws and regulations, and to take into account your evolving situation and wealth position. Stay on top of and in tune with the law, use legitimate tax mitigation techniques, and utilise professional advice from your wealth manager. You and your money can cross borders more easily than ever – but so can the HMRC.
To learn more about the carry back facility available to EIS investors, the seven-year rule applied when calculating IHT, and techniques to reduce your capital gains tax liability, and discuss how personal tax planning can reduce your tax liability, contact one of our wealth managers today.