Tax planning is an essential part of wealth preservation for high earners. Strategic tax management does not just reduce your tax bill in the here and now but also ensures that wealth is passed on efficiently.
With several major tax changes scheduled to come into force this spring in the UK, it is more important than ever to stay on top of the evolving tax landscape and to seek professional advice to take advantage of available allowances and reliefs before the end of the tax year.
As 6 April approaches, Spear’s experts explore key ways for wealthy individuals to reduce both current and future tax exposure.
The role of life insurance
Marc Acheson, global wealth specialist at Utmost Wealth Solutions, explains various taxes come into play at different points, influencing the need for strategic advice.
‘While tax considerations alone rarely drive individuals to relocate, many adopt legal, non-controversial measures to reduce their liabilities. Just as businesses optimise costs to enhance profitability, efficiently managing tax obligations can accelerate financial growth and free up capital for further investment.’
Among the tax-saving tools is life insurance, which can help mitigate IHT exposure on both lifetime gifts and upon death.
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John Annetts, head of wealth and succession at Howard Kennedy, says this approach allows families to preserve assets such as the family home.
But he warns that any policy must be placed in trust to keep it outside of the estate.
‘Premiums are often paid through the normal gifts out of income exemption, assuming the policyholder is in good health at the time of purchase and the premiums are affordable,’ he says.
Annetts advises that a seven-year decreasing term insurance policy can cover potential liability if substantial lifetime gifts are made and the donor passes away within seven years.
He also stresses the importance of timing: ‘Generally, the younger you are (assuming good health), the lower the premiums, making timing a crucial factor. A good time to start considering life insurance for IHT purposes is in your early to mid-60s, as the premiums will likely be more affordable and manageable at that stage.’
Family Investment Companies (FICs) v Trusts
Family Investment Companies (FICs) have gained popularity following tax changes that made trusts less attractive.
FICs provide a tax-efficient way to transfer assets to children while retaining control over the funds indefinitely or until they are mature enough to manage their wealth.
While FICs offer tax advantages, they differ from trusts in terms of flexibility. Trusts provide greater control, discretion, and adaptability, allowing for more personalised asset management. FICs, however, are bound by corporate rules, which are less adaptable.
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‘Many HNW families are also hesitant to allow their children to inherit substantial sums at the relatively young age of 18,’ says Annetts.
‘Consequently, a vehicle that enables families to transfer assets to their children in a tax-efficient manner, while retaining control over the funds either indefinitely or until the children are mature enough to manage their wealth, is highly appealing.’
While FICs offer tax advantages, they differ from trusts in terms of flexibility.
‘Trusts provide greater control, discretion and flexibility, allowing for more personalised management of assets. FICs, however, are bound by corporate rules, which are less adaptable,’ says Annetts.
Having clear long-term objectives is crucial when establishing an FIC to avoid complications and tax triggers down the line.
Annetts says: ‘Taking advantage of the current circumstances over the next few months is essential, as these opportunities may disappear indefinitely.’
Plant the seed
Elsa Littlewood, tax partner at BDO suggests business owners and entrepreneurs consider Seed Enterprise Investment Scheme (SEIS), Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs).
‘Under the SEIS, an individual can invest up to £200,000 in 2024/25 in start-up enterprises in a tax year and claim income tax relief at 50 per cent, irrespective of his or her marginal rate of tax, up to a maximum of £100,000,’ she says.
‘Investments in qualifying EIS companies (for example, certain companies listed on AIM or that are unlisted) attract income tax relief at 30 per cent on a maximum annual investment of up to £1 million for qualifying individuals. This doubles to £2 million for investments into ‘Knowledge Intensive Companies’.
‘Investments in VCTs provide income tax relief at 30 per cent on qualifying investments of up to £200,000 and dividends received from the units are tax-free. In addition, the VCT can buy and sell investments without suffering CGT within the trust and there is no CGT payable on any gain made when you sell the VCT units.’
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Tax deferral through offshore bonds
Offshore bonds serve as a tax deferral mechanism, particularly for individuals who now face taxation on an arising basis for their foreign investment portfolios.
The primary advantage of offshore bonds is the ability to defer tax liabilities. If managed carefully, with a focus on the timing of encashment or assignment, offshore bonds can enable tax-efficient wealth transfer to the next generation.
Certain jurisdictions, such as Italy and Switzerland, offer favourable offshore bond opportunities. Additionally, some countries with older double tax treaties with the UK may help mitigate inheritance tax implications for long-term residents.
‘Offshore bonds are particularly relevant as former non-doms now face taxation on an arising basis for their foreign investment portfolios,’ Spear’s recommended tax lawyer, Liz Palmer, head of private wealth at Howard Kennedy, explains.
‘The main advantage of offshore bonds is the deferral of these tax liabilities. If managed carefully, with a focus on the timing of encashment or assignment, you can pass value to the next generation in a tax-efficient manner.”*
Philanthropy as a tax-efficient strategy
Philanthropy has long been a popular tax-efficient strategy and continues to gain in popularity, but how wealthy individuals give is changing. Donors are shifting towards strategic giving rather than simply making ad hoc charitable contributions, allowing for greater engagement and impact.
Charitable donations are inheritance tax-free, reducing the taxable value of an estate. If 10 per cent or more of an estate is left to charity, the inheritance tax rate on other gifts reduces from 40 per cent to 36 per cent. Additionally, gifting investment portfolios to charities can avoid capital gains tax liabilities that would otherwise be incurred upon sale.
‘I’ve come across clients who’ve had a significant investment portfolio, which they’ve concluded they don’t need and have donated the portfolio to charity. The charity can then redeem this without having to pay the capital gains tax.’
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Steven Appleton, head of private clients at Brabners, says the growing interest in philanthropy is being driven by several factors, including social media, and a rise in social responsibility and purpose.
But research shows that wealthy donors are prevented from giving more than they would like to charity, because they simply ‘don’t know where to start’, says Appleton.
‘While around half of the nation’s wealthy access financial advice in some form or other, just 8 per cent receive any guidance on their giving strategy,’ he says.
This is despite figures demonstrating that from a financial perspective, philanthropy results in greater wealth retention across generations.
‘From a more subjective standpoint, charitable donations are also about engaging the next generation on philanthropy by passing on values. I’ve seen families talking with children and grandchildren about how money works and being empathetic to the needs of others. It’s particularly important in families where the “wealth creator” worked hard to come up from nothing but their children have grown up in comparative luxury,’ says Appleton.
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Diversify, diversify, diversify
A well-structured tax strategy should be diversified across various financial instruments and structures. Tax-privileged solutions may include pensions, ISAs, national savings products, corporate structures, and trusts. Life assurance can also play a role by deferring taxes until a later point, preserving capital in the meantime.
Seeking expert advice is essential to navigating inevitable tax changes. Maintaining a balanced portfolio of tax-efficient structures ensures a robust long-term financial plan.
Acheson tells Spear’s: ‘Diversification is key and may include tax-privileged structures like pensions, ISAs, national savings products, corporate structures and trusts.’
Acheson stresses that seeking expert advice is essential: ‘Having a wealth manager and access to expert advice ensures families can navigate inevitable tax changes.’
