Tax planning sits at the heart of every successful wealth management strategy. Talking tax can be difficult. It doesn’t have the glamour of planning an investment portfolio or discussing a lucrative business exit, but tax planning is pivotal to your financial future. Everyone can benefit from understanding the fundamentals.
Tax planning is embedded into every aspect of wealth management. Whether you are thinking about investing, estate planning, cashflow management, philanthropy, marriage or divorce, schooling, property, business succession or anything else, tax planning will play a central role. It is especially important for international citizens whose tax affairs cross borders.
What is tax planning?
The ultimate aim of tax planning is to make your finances more tax efficient. A good wealth manager will highlight to you the various ways that you can achieve tax efficiency. Some obvious tax planning tools in the United Kingdom include ensuring you are in a beneficial tax bracket, utilising a pension scheme, contributing to an Individual Savings Account (ISA) and dealing appropriately with capital gains. You should also discuss with your adviser the amount of dividends you take from your investment portfolio. It is also important to stay on top of any tax deductions you are entitled to, perhaps for your business, and any tax credits that you may be due.
Tax planning is important because it ensures you are as tax efficient as possible, but it also allows you to stay compliant with the law and avoid paying any onerous penalties. It’s useful to look at tax planning in terms of what is mandatory and what is voluntary. There are certain things that you have to do when it comes to tax and there are other things that you can choose to do. A sophisticated approach to tax planning will ensure that you cover the mandatory bases, but also go above and beyond to make sure you are as tax efficient as possible.
The fundamentals of tax planning
Tax planning starts with an understanding of tax laws and the various tax brackets that affect individuals and businesses. It includes making strategic investments, savings decisions, and timing income recognition, which can significantly affect how much tax you owe each year.
Tax efficiency
Tax efficiency is about structuring your financial affairs in such a way that you minimise the amount of tax you pay. This includes choosing the right type of investment portfolio, the best retirement plan and other tax efficient financial products.
Tax deductions
Tax deductions reduce your taxable income. They stem from various expenses you might incur during the year, such as mortgage interest, medical bills or education. Understanding what can be deducted and how to claim these can significantly decrease your tax liability.
Tax credits
Unlike deductions, which lower your taxable income, tax credits directly decrease the amount of tax you owe. Common tax credits include those for education, for low-income taxpayers, or for those supporting children and dependents.
Philanthropy
Philanthropy is often overlooked in the UK when it comes to crafting an effective tax planning strategy. Wealthy individuals often choose to share their wealth through charitable donations, but simply signing up to a direct debit or handing over cash are less than suitable options. At the other end of the scale, charitable foundations are a well-known and effective method of passing your wealth to others, but the effort required to administer one can be significant. A tax-efficient, flexible and relatively cheap option is to set up a Donor Advised Fund (DAF). DAFs provide charitably minded high-net-worth individuals with a useful middle ground. The funds are established under an umbrella charity that administers them on behalf of the donor.
Financial advantages of effective tax planning
Effective tax planning offers several financial advantages that can significantly impact both individuals and businesses. These can include reducing your tax liability and enhancing your cashflow, allowing you to make better investment decisions.
Legal compliance and avoidance of penalties
Adhering to tax laws and regulations is fundamental to any tax planning strategy. By staying compliant, you avoid penalties and interest, which can be substantial and detrimental to your financial health.
Tax planning in investment strategies
Tax planning is integral to investment strategies as it helps maximize after-tax returns. By selecting tax-efficient investments and strategically placing assets in accounts with tax benefits, investors can reduce tax liabilities, increasing the effectiveness of their investment portfolio and securing better overall financial gains.
Adapting tax strategies over time
Adapting tax strategies over time is essential as personal circumstances and tax laws evolve. Regularly reviewing and adjusting your tax plan ensures it aligns with life changes like marriage, parenthood or career shifts, and accommodates legislative updates, maximising tax benefits and maintaining compliance efficiently.
Tax planning for marriage
Marriage and family add additional layers of complexity to a tax planning strategy. There is more to think about in this context, but also some potential advantages. An international marriage, for example, raises the issue of assets being held in separate jurisdictions and puts a spotlight on the levels of tax efficiency that come with that. As a family grows larger, issues of gifting and inheritance tax become more prominent.
Estate tax planning
Estate tax planning involves strategies to minimise the taxes your estate will have to pay upon your death. This planning ensures that your heirs receive the most from their inheritance.
Tax changes for homeowners
Homeowners face unique tax situations, such as property taxes, potential deductions for mortgage interest, and capital gains tax for selling a home.
The value of professional tax advice
Professional tax advisors are crucial in navigating complex tax laws and planning strategies. They provide valuable advice tailored to your specific financial situation, helping you to maximise your tax benefits.
Tax planning for international Americans
At London & Capital, we are proud to count numerous international Americans as clients, assisting them with managing their wealth both inside and outside the United States. The US operates what is known as citizenship-based taxation, which means citizens are taxed on their worldwide income wherever they happen to live. This means that unless they renounce their citizenship, international Americans will have to file a US tax return and pay US taxes whilst living abroad. International Americans cannot simply wave goodbye to US tax obligations when leaving the country and will often be subject to two separate tax regimes when they are residing abroad. This revelation can initially be quite alarming to the newly international, but the US government does have a series of treaties and provisions in place to help its citizens avoid the pitfall of double taxation.
It is important for international Americans in the UK to be aware of the different tax periods in the two countries. The UK tax year runs from the April 6 to the following April 5, whereas the US follows the more straightforward calendar year. This essentially gives international Americans living in the UK two tax year-ends. These overlapping reporting periods can be particularly complex when it comes to foreign tax credits and it is advisable to discuss this issue with your wealth manager.
Proactive tax planning tips
A key facet of any tax planning strategy is that it should adapt over time. Personal and professional circumstances evolve and that means tax planning should change too. At London & Capital, we are dedicated to equipping our clients with the best possible approach to tax planning and keeping that plan current. If you would like to discuss tax planning with one of our wealth managers, we’d be more than happy to hear from you.
