Tax planning helps you in analyzing your financial situation and aligning it with your financial objectives in the most tax-efficient manner. Strategic tax planning is important to ensure that various taxes don't eat away your hard-earned cash. Robust tax planning and mitigation will also help you in understanding the exact amount of taxes that you are actually paying.
If you are a high net worth individual, you may have to deal with the regular as well as a few uncommon taxes. Knowing the latest taxes, regulations, and rates will help you in ensuring that your tax planning is productive. As a high net worth individual (HNWI) having assets like shares, production machinery etc., it is quite possible that you may have to pay capital gains tax (CGT). So, why not plan in advance to retain your much-valued money?
Here are our top 6 tax planning ideas to consider:
1. The Enterprise Investment Scheme
High Net Worth Individuals can advantage of tax investment programmes such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS). Introduced by the UK government to boost the country's economy, these programmes are open to HNWIs and self certified Sophisticated Investors to help them invest in startups with brilliant business ideas.
Through the EIS, smaller startups can raise a huge amount of capital, while incentives for investors come in the form of tax relief. According to the scheme, an investor or a taxpayer can avail a maximum tax reduction of 30% on the actual investment or £300,000, whichever is less. Apart from this tax relief, the EIS also offers incentives on taxes related to capital gains i.e. the total gain an investor would enjoy if their shares were sold. As an interested investor, you can also buy shares from a qualifying company directly or through an Enterprise Investment Scheme fund.
Click on the image below to access our detailed Investors Guide to EIS & SEIS
2. Get Help for Tax-Free Allowances
No matter how wealthy you are, making the most of your basic tax reliefs and allowances is definitely worth a try. Over the years, their value must have improved drastically. Making use of your tax-free allowances in terms of savings income, dividend income, capital gains, and basic income tax will help you get tax-free money worth around £29,000 per year.
3. The Rent a Room Scheme
The Government's "rent a room scheme" allows you to earn tax-free income up to a threshold of £7,500 per year tax-free by renting out furnished accommodation in your current residence. This is halved if you share the income with your partner or someone else.
The tax exemption is automatic if you earn less than the threshold. This means you don’t need to do anything. However you must complete a tax return if you earn more than the threshold. From 6 April 2016, this is £7,500.
You can then opt into the scheme and claim your tax-free allowance via your tax return. You can choose not to opt into the scheme and instead record your income and expenses on the property pages of your tax return.
4. Tax Breaks Through Pensions
Pensions are the most tax-efficient way to save money as pension tax breaks are quite generous. Similar to ISAs (Individual Savings Accounts), you also have the option to save on behalf of your children in pensions.
5. Gift Aid
If you are earning over £43,000 per year, you can reduce your tax bills through charitable gifting. The tax benefit on charities is split between a taxpayer and a charity. A charity or an amateur sports club can utilise "gift aid" for claiming an additional 25% on every £1 taken from a taxpayer. A higher-rate taxpayer in turn can reclaim another 25% while filing your tax return.
6. Income Shifting
If you are married, consider transferring your various income-producing assets to your spouse and use their tax- free personal allowances. This process works best for couples when one is a higher rate income taxpayer and the other is a basic or non taxpayer. Before getting into the income-shifting mode, married couples should thoroughly evaluate their income generating assets including portfolio investments, properties, or bank accounts and get the required guidance from a financial expert.
Understanding the different ways to have your assets transferred will also help couples share their income in the right manner post taxation. Tax planning is in no way a one-time process. It has to be continuously reviewed to ensure that you are complying with the laws and regulations that keep evolving.
You will also have to keep a tab on your financial condition that may change every month. Keep yourself well-informed about the latest tax mitigation strategies through an experienced wealth manager. Legitimate and right tax planning will surely help you in keeping hold of your money with ease.