Benjamin Franklin once famously said “In this world, nothing is certain except death and taxes"
After all, they’re two of life’s immutable realities. Sure, no one can dispute the former, but the truth about the latter is, not necessarily.
The playbook for the ultra-wealthy is not always that straightforward. With their net worth combined with the right know-how and strategies, it’s entirely possible to actually pay less, not more.
Savvy investors and the super-rich use a variety of legal strategies to from tax deferment options and tax breaks to employing capital gains strategies and choosing beneficial company structures.
And it’s not about dodging legal responsibilities but instead using knowledge of tax laws to minimise what's owed. Best of all, each strategy is perfectly legal, exploiting no loopholes but rather using the very rules that are in place to protect their wealth.
Given these insights, you might wonder how accessible these strategies are. How wealthy do you need to be to start seeing their benefits, and what steps can you take to begin optimising your tax situation today?
Threshold for tax strategies
In practice, these strategies begin to make sense once you reach a level of wealth where the potential tax savings or deferments outweigh the costs of implementation. This could start from lower thresholds like $500,000 in investable assets, especially if the assets are exposed to high tax jurisdictions.
However, even if your assets are more moderate, there’s still significant value in consulting with tax professionals. This can help you uncover various deductions and credits tailored to your financial situation and explore retirement structures that offer tax-efficient growth opportunities.
Tax tactics of the elite
For HNWIs or UHNWIs (Ultra High Net Worth Individuals), that is those with investable assets of at least $1 million or $30 million respectively, the strategies can be more complex.
It’s not just about having the wealth; it’s about knowing what to do with it. The strategies used typically have to factor in assets over numerous jurisdictions, multiple tax residencies and the interplay between different tax laws.
Tax planning becomes a full-time endeavour that needs a dedicated team rather than the usual last minute scramble at the end of the year.
Some of the popular tools include minimising capital gains, setting up holding companies in jurisdictions with favourable tax laws, and the use of charitable donations and gift exemptions, to name just a few.
Are all viable options, with each method tailored to not only preserve wealth but also to ensure that it grows, all within the bounds of the law.
Curious about how these strategies work? Here are more details on some of the most popular ones and how they could be adapted for those looking to elevate their financial game.
Managing assets through holding structures
One effective strategy is using a holding structure, such as a Limited Liability Company (LLC), to oversee multiple assets —be it real estate, stock holdings, or other business interests.
Set up as a management company, an LLC consolidates your assets all into one entity. By centralising your investments under a single umbrella, you get a clearer picture of your overall financial situation and make it easier to manage investments and make informed decisions.
The process involves creating an entity that holds assets separate from your personal estate or operational business units, thereby shielding them from business liabilities and enhancing tax efficiency. For instance, profits from investments can be managed in a way that minimises tax liabilities by taking advantage of jurisdictions with more favourable tax laws.
The UAE, in particular, offers the perfect environment. With its free zones that provide benefits like zero corporate and personal tax rates, full foreign ownership, and no currency restrictions, it’s an ideal location to manage international assets effectively.
By centralising asset management in this way, not only can you protect your wealth, but you also simplify the complexities associated with large-scale investments. It’s a proactive approach that, while it may seem complex initially, provides significant benefits in terms of asset protection, tax optimisation, and succession planning.
Charitable donations
Charitable donations are a go-to strategy for many wealthy individuals looking to reduce their tax burden while doing some good in the world. The basic idea is simple: by donating to recognised charities, you can often deduct those contributions from your taxable income, which lowers the amount of tax you owe.
But it's not just as simple as just writing a check to your favourite cause, it involves understanding the different types of donations you can make and the tax implications of each. For instance, you can donate cash, but you can also give away appreciated assets like stocks or real estate. When you donate appreciated assets, you not only get a deduction for the market value but also avoid paying capital gains tax on the appreciation, making it a win-win for both you and the charity.
In the UAE, where there's no personal income tax, the focus of charitable giving isn't so much on reducing your tax bill but on enhancing your social and corporate responsibility footprint. However, if you have international income or investments in jurisdictions where tax deductions apply, charitable giving remains a valuable tool.
When it comes to the amount, there's no one-size-fits-all answer. Some wealthy individuals set up foundations or donor-advised funds (DAFs) to manage their giving over time. Others prefer to make significant one-time contributions. In the UAE, large donations can also be made in the form of Zakat, a form of almsgiving that's one of the Five Pillars of Islam, typically calculated at 2.5% of one's savings.
Estate planning and gift exemptions
In many countries, there are specific exemptions that allow you to gift a certain amount of money or assets either during your lifetime or upon your death without incurring significant taxes.
For example, the UK has an Inheritance Tax (IHT) threshold, known as the nil-rate band, which allows you to pass on up to £325,000 without incurring inheritance tax. If your estate is worth more than this, IHT is typically charged at 40% on anything above the threshold. However, if you leave your home to your children or grandchildren, the threshold can increase by up to an additional £175,000, making the total potential exemption £500,000 per individual.
Youcan also give away up to £3,000 each tax year as a part of your annual gift allowance, which is exempt from inheritance tax, and make small gifts of up to £250 per person to as many people as you like each tax year, provided they haven’t already received part of your £3,000 annual exemption.
In the UAE, while there’s no inheritance tax, with 90% of the country’s population made up of expatriates, estate planning is still vital to avoid the application of Sharia Law to your assets by default.
Fortunately, for non-Muslims, the DIFC Wills Service Centre provides a solution by allowing expatriates to register a will under familiar common law principles rather than defaulting to local inheritance laws.
You can also trusts and foundations in the major financial centres of DIFC and ADGM. These allow you to set specific terms and conditions for the distribution of your assets and can simplify the management and distribution of assets, potentially reducing issues around cross-border estate transfers.
Capital gains strategies
When you own property or investments in several countries, understanding jurisdictional differences and carefully planning the sale of assets to minimise tax liabilitiescan lead to significant savings.
For the globally mobile or those with diverse portfolios, one common strategy is to time the sale of assets to coincide with residency in lower-tax locations. By aligning the sale of an asset with a period when you're residing in a country with favourable capital gains tax laws—or possibly no capital gains tax at all—you can significantly reduce what you owe.
Another technique involves using losses in one part of your portfolio to offset gains in another. If you’re facing a potential tax hit on gains from an asset, you might consider selling off another asset that’s underperforming to balance out the overall liability.
For those who have the flexibility, structuring the ownership of your assets through holdings in different countries can also be beneficial. Setting up trusts or companies in jurisdictions with beneficial tax treaties or lower capital gains rates can protect your assets from higher taxes and simplify the management of your global investments.
Maximise your financial opportunities
The above strategies require careful planning and a good understanding of international tax laws, so it's often wise to work with a tax professional who can provide guidance tailored to your specific situation.
While there are many creative strategies you can use, if you want to protect what you’ve built, regularly reviewing and adjusting your investment structure in response to changes in tax laws and market conditions is key. It’s also beneficial to diversify your investments not just across asset types but also across jurisdictions.
To ensure you’re maximising your financial opportunities while staying compliant, consider reaching out for expert advice. Contact a tax professional today to tailor a strategy that best suits your needs and safeguards your assets for the future.
