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How high-net-worth individuals can legally reduce their tax bill

HNWIs can use a number of strategies to minimise taxes, including investing in tax-advantaged investments and accounts.

By LLM Reporters  |  July 13, 2022
tax planning

There’s a lot to be said for having a healthy bank account when it comes to financial security, but no matter how large your fortune happens to be, the majority of us still seek to hold onto as much of our own money as possible. After all, it’s human nature, and when you’ve worked hard for it, it stands to reason that you’d want to put it to good use – whether that means investing it for the future or spending it on something you love.

The good news is that whilst it’s a fact of life that the more money you earn, the more tax you’ll have to pay, there are some perfectly legal methods for wealthy individuals to reduce your tax burden. Here, we take a look at all you need to know to make them work for you, as well as the moves you can make today to do just that.

Defining high-net-worth individuals

Prior to 2016, HMRC considered anyone with a net worth of more than £20 million to be a high-net-worth individual, but this threshold has since been lowered to £10 million. However, technically there is no one definition that encapsulates what a high-net-worth individual is and classifications can vary. For example, the FCA considers those who have a net worth of no less than £3 million or a yearly income of £300,000 to be high-net-worth individuals.

It’s also worth noting that high-net-worth individuals will be categorised differently around the world, so while you might be classed as one in the UK, this may not be the case abroad. Some countries will also differentiate between high-net-worth individuals and ultra-high-net-worth individuals. For example, in the USA, someone with a minimum of $30 million would fall into the latter category.

Prior to 2016, HMRC considered anyone with a net worth of more than £20 million to be a high-net-worth individual, but this threshold has since been lowered to £10 million

High-net-worth individuals and tax

While there is no specific extra tax applied to high-net-worth individuals, many who find themselves in this category are willing to invest both time and money into legally reducing the tax they pay. This is because most high-net-worth individuals will fall into higher tax bands and may not benefit as much from tax-free thresholds as those with a smaller number of assets or lower income. However, just because your £1,000 trading allowance seems like a drop in the ocean, this doesn’t mean there aren’t other tax reduction methods you can take advantage of.

Starting a tax reduction strategy

Reducing your tax bill requires careful planning, and no two strategies will look quite the same. The way you approach your tax return will depend on the type of assets you have and how you run your business. Here are some options that many individuals use to get started:

Hire a personal accountant

Even the most money-savvy high-net-worth individuals can benefit from hiring a good accountant to help them with their tax affairs. Tax codes, allowances and expenses can be complicated and take a considerable amount of time to fully understand and navigate successfully for someone with many different sources of income.

What’s more, tax law is always changing and it can be hard to stay abreast of changes when you have businesses to run or an estate to manage. For example, since April 2022, all VAT-registered businesses need to use MTD software to complete their tax return. Moreover, high net worth individuals typically have multiple financial interests, some of which can be offshore, so tax planning can become complicated, which is why wealthy individuals should seek professional advice.

Open an ISA

Opening an ISA or Individual Savings Account is one of the simplest ways to reduce the amount of tax you pay on your savings or investments. Each adult in the UK has a £20,000 ISA allowance that renews at the start of every tax year, meaning that over time, individuals can benefit from significant sums of money being tax-free. However, you must remember that while it’s possible to pay money into both a cash ISA and an investment ISA in the same tax year, the total sum of the money deposited shouldn’t exceed the £20,000 threshold. 

Consider joint ownership

If you have a spouse or civil partner in a lower tax band than you, then transferring some of your assets to them could decrease your tax bill. Transferring your assets to anyone other than a spouse may make you liable to pay capital gains taxes, which could cancel out some of the benefits of your transfer, at least in the short term. It’s possible to transfer a wide range of assets to your spouse, such as property, shares and investment funds.

Gift exemption

As a high-net-worth individual, you may not only be concerned about reducing your own tax, but the inheritance tax your beneficiaries may have to pay when you die. If you have children or grandchildren you’d like to give money to, it’s important to make the most of your annual £3,000 gift allowance. This means you can gift this money to your loved ones without it being considered part of your estate after your death, thus making it exempt from inheritance tax.

Sometimes borrowing money is unavoidable, but certain strategies can help you ensure that your mortgage is as tax-efficient as possible

Tax-efficient borrowing

Sometimes borrowing money is unavoidable, but certain strategies can help you ensure that your mortgage is as tax-efficient as possible. If you have borrowed money on a buy-to-let property, it can make more financial sense to increase the amount you’ve borrowed versus the amount you’ve put down as a deposit. This is because you may be able to claim tax relief on this borrowed money, which will allow you to reduce the mortgage you have on your home.

Enterprise investment scheme (EIS)

If you want to make more tax savings and you have already used up your ISA allowance, you could consider investing money into an EIS. You will typically be able to invest much greater amounts of money into your EIS than your ISA and any shares you purchase as part of the scheme should be exempt from both inheritance and capital gains taxes.

Look for offshore opportunities

Having bank accounts or business dealings in offshore regions can help you to make tax savings. If you’re a British resident, you may be able to leverage the generous tax laws of regions like Luxembourg, Liechtenstein, the Channel Islands and the Isle of Man. While you will have to declare all your income to HMRC, you may be able to defer some tax and make the most of any interest or profits you earn.

Take control of your tax today

The best way to feel more in control of your finances and reduce your tax is to speak to a financial advisor or accountant before making any changes. Professional guidance can go a long way in making sure you’re abiding by tax laws while benefiting from every allowance or threshold HMRC has to offer.