Tax challenges at the top

High-net-worth individuals face intricate taxation challenges due to global regulations and economic shifts. Strategic asset allocation, estate planning and international tax navigation are key. Regular tax strategy reviews are essential as circumstances change


Few challenges are as complex and ever-evolving as taxation, particularly for high-net-worth individuals (HNWIs). What was once considered a straightforward financial consideration has morphed into a multifaceted puzzle of regulations, most notably the Foreign Account Tax Compliance Act and the Common Reporting Standard, bringing increased demands for transparency and a heavier compliance burden.

Tax brackets and investment strategies, too, have been made even more intricate by the seismic shifts brought about by Covid-19. In the wake of the pandemic, the financial world witnessed an unprecedented array of economic stimuli, tax code changes and shifts in global trade dynamics. These events, coupled with the perennial complexities of high-net-worth taxation, have thrust savvy investors and finance professionals into a new era of fiscal strategy.

Michael Parets, a partner specialising in private tax at Ernst and Young says: “The direction of travel is one that isn’t likely to change any time soon. It’s becoming increasingly critical for individuals to have a totally transparent view of their tax liabilities and obligations, and that of their families, across all the jurisdictions where tax is payable, as well as having systems in place to monitor any tax changes and their implications.”

Strategic tax allocation
The cornerstone of successful high-net-worth taxation lies partly in strategic asset allocation. By diversifying investments across various asset classes, including equities, bonds, property and cash, individuals can not only optimise their investment portfolios for long-term financial goals but also minimise their tax exposure.

HNWIs are acutely aware of the significance of optimising their available allowances. When weighing the advantages and disadvantages of annual allowances and potential contributions to pensions or stocks and shares ISAs, as well as assessing the merits and drawbacks of utilising carry-forward and capital gains allowances, they not only stand to benefit from potential income tax advantages (in the case of pensions) but also enable tax-free capital gains. Strategies like charitable trusts, donor-advised funds and direct donations not only support charitable causes but also offer appealing opportunities to reduce taxable income.

Estate planning goes beyond passing on assets; it’s about minimising estate taxes. For HNWIs this may involve the creation of trusts, strategic gifting and leveraging lifetime estate and gift tax exemptions to protect family legacies. Chartered Financial Planner Andy Hearne, of Financial Planning Partners (FPP), says: “Often the simplest of measures can be some of the most effective, such as adding to or retaining money held in pensions, which fall outside of a taxable estate, or simply gifting or even spending money. After all, you can’t take it with you.”

In today’s globalised world, many HNWIs have international investments and income sources. Navigating international tax laws, treaties and reporting requirements is essential to avoid pitfalls and maximise opportunities in cross-border taxation. Hearne tells World Finance, however, that this complexity can add risks. “All taxation regimes change and shift regularly, which in turn requires up-to-date expertise in each jurisdiction and regular reviews to ensure that any global tax planning strategy is robust and kept up to date,” he says.

For HNWIs with business interests, selecting the right business structure can have a significant impact on taxation. Whether it’s a private limited company, an LLP, or another structure, each has its own tax advantages. Succession planning should also be a priority to ensure a smooth transition of assets to the next generation.

Tailoring tax
In retirement, managing withdrawals from various accounts becomes paramount for HNWIs. Strategies such as pension drawdown, tax-efficient investments and retirement planning can be employed to minimise tax burdens and maximise the longevity of retirement savings. High-net-worth taxation is not static. Regular review and adaptation of tax strategies are crucial as financial circumstances change and tax laws evolve, ensuring that HNWIs remain compliant with tax regulations.

Hearne concludes: “It’s important to remember that tax planning prudently can add tens, if not hundreds, of thousands of pounds over the years and decades. However, there’s a saying that goes: ‘The tax tail should not wave the investment dog.’ In other words, just because something is tax-efficient does not mean that it is the best route forward. It’s important to understand the pros and cons of a multitude of tax planning strategies before determining which combination would work best, in order to meet short, medium and long-term lifestyle goals, while also retaining financial flexibility for anything unforeseen.”

High-net-worth taxation is a complex and constantly evolving domain that necessitates meticulous attention, strategic planning and adaptability. This is particularly crucial considering that HNWIs make up only a small fraction of the global population while possessing a substantial share of the world’s wealth. According to Credit Suisse’s Global Wealth Report, the top one percent of wealth holders owned nearly half of the world’s wealth, underscoring the significance of effective tax management in this context.