Tax planning for high net worth individuals is a complex, important topic for affluent clients. This is even more the case following the announcements made in the UK’s Budget in October 2024.
As a result, we have distilled some of the key components of tax planning for individuals and families with significant assets into this easy to understand article.
Tax planning should be a financial priority for wealthy individuals. It requires a detailed approach to comply with the law and protect and grow one’s assets.
However, laws change and the financial implications are often significant. For affluent people with businesses, accountants take care of most aspects of the company’s finances.
One the other hand, wealth managers help high net worth individuals accumulate assets in a tax efficient manner.
The importance of tax planning for wealthy individuals
Effective tax planning ensures that high-net-worth individuals:
- Preserve wealth
- Reduce tax liabilities
- Accumulate assets
Without a strategic approach, significant wealth can be lost to unnecessary taxation.
Here’s why tax efficient planning is key for high net worth people:
- Reduces income, capital gains, and inheritance tax exposure
- Ensures assets are structured efficiently for wealth transfer
- Maximises tax relief through investments and allowances
- Protects assets using trusts and tax-efficient vehicles
- Aligns financial planning with changing tax regulations
- Enhances philanthropic impact while lowering tax bills
- Provides flexibility to adapt to economic and legislative shifts
Let’s explore some of the most common ways high net worth individuals reduce and save tax.
Ten tax planning strategies for high net worth individuals
In this guide, we focus on seven key areas covering:
- Inheritance tax planning
- Setting up trusts
- Making use of personal pensions
- Corporation Tax reduction through pensions
- Estate planning
- VCTs and EIS scheme
- The role of wealth managers
- Charitable giving
- Offshore bonds
- Low interest loans to avoid CGT
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1. Inheritance tax planning
Inheritance tax can significantly reduce the assets you leave behind. However, there are ways to reduce or avoid this tax completely.
Lifetime gifts, annual exemptions, the residence Nil-Rate Band and investing in qualifying relief assets can mitigate these taxes.
Furthermore, life insurance held in trust, offers a way to cover inheritance tax liabilities, preserving the value of your estate for future generations.
Example
John and Sarah, a high-net-worth couple, own assets worth £5 million, including property, investments, and savings.
Without planning, their estate could face a significant inheritance tax (IHT) liability.
By gifting assets gradually under the seven-year rule, setting up trusts, and making use of Business Relief, they can reduce IHT exposure, ensuring more wealth is passed to their children.
Why does inheritance tax planning matter for high net worth individuals?
- Protects family wealth from a 40% inheritance tax liability
- Ensures assets are passed on efficiently and tax-effectively
- Uses trusts, gifting, and exemptions to reduce taxation
- Prevents forced asset sales to cover unexpected tax bills
- Aligns estate planning with long-term wealth preservation goals
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2. Using trusts
Trusts are a powerful tool in tax planning, offering control over how your assets are managed and distributed.
They can reduce taxes and ensure your wealth is allocated according to your wishes.
From discretionary to lifetime trusts, the proper trust structure can be beneficial in reducing inheritance tax burdens.
If you are seeking advice on this matter, you should look to work with a firm that offers dedicated estate planning services.
Example
Emma, a retired entrepreneur, wants to pass wealth to her grandchildren but is concerned about inheritance tax and financial responsibility.
She establishes a discretionary trust, allowing trustees to manage distributions while minimising tax exposure.
This approach ensures tax efficiency while protecting funds from mismanagement or external claims, such as divorce settlements.
Are trusts an effective tax planning tool for high net worth families?
- Provide a tax-efficient way to pass wealth to future generations
- Reduce inheritance tax liability by removing assets from the estate
- Protect family wealth from divorce, creditors, or mismanagement
- Allow control over how and when beneficiaries receive assets
- Enable tax-efficient gifting while maintaining financial security
3. Making use of pension contributions
For higher and additional rate taxpayers, pensions are among the most tax-efficient ways to invest.
By maximising pension contributions, high earners can reduce their taxable income and also secure tax relief at their highest marginal rate.
As a result, this fosters significant wealth accumulation over time.
Example:
Dhruval, a higher earning company director, has maxed out his ISA allowance and is seeking tax-efficient ways to save for retirement.
By contributing the maximum allowable amount into his Self-Invested Personal Pension (SIPP), he benefits from 40% tax relief.
Therefore, this means he is growing his investments tax-free, until he reaches the point of retirement where he can start to withdraw from his pension.
Related reading: Is a SIPP better than a personal pension?
The tax planning benefits of maximising pension contributions for wealthy investors
- Provide significant income tax relief on contributions up to annual limits
- Grow investments tax-free within the pension wrapper
- Enable flexible withdrawals with lower tax implications in retirement
- No lifetime allowance limits, but, pensions will be subject to IHT in future
4. Using pension contributions to reduce Corporation Tax
Tax planning for high net worth individuals, also covers business taxation.
Business owners have the unique opportunity to lower their corporation tax by using company funds to make contributions to their pension fund.
This strategy does not only reduce the taxable income of the business, but also enhances the individual’s retirement savings in a tax-advantaged manner.
Example:
Sarah owns a successful consultancy firm and wants to reduce her corporation tax bill while securing her retirement.
She decides to contribute £50,000 into her pension via her company, which is fully deductible as a business expense.
This reduces her company’s corporation tax liability while boosting her pension savings tax-efficiently.
In addition to reducing corporation tax, there are several other ways business owners use pensions to reduce taxes. One of these is salary sacrifice, so if you’re a high net worth business owner, you will learn more from the above article.
5. Estate planning
Beyond drafting a will, estate planning encompasses a holistic approach to managing your financial affairs.
It ensures your assets are distributed as desired, taking into account any potential tax implications.
Strategic use of trusts, charitable donations, and other legal structures can play a pivotal role in wealth management and preservation.
Example
James, a high-net-worth individual with multiple properties and investments, wants to protect his wealth for future generations.
To achieve this, he could consider combining trusts, gifting strategies, and tax-efficient investments.
Ultimately with the right estate planning advice, he can ensure his assets are optimally structured to minimise tax liabilities while preserving his family’s wealth.
6. VCTs & EIS (Venture Capital Trusts & Enterprise Investment Scheme)
VCTs and EIS offer appealing tax benefits. This includes income tax relief and capital gains tax exemption.
These schemes encourage investment in small, growing businesses, albeit with higher risk.
If you are new to this topic here is an overview of each:
- VCTs: A UK investment fund that pools money to invest in small, growing companies, offering investors tax benefits and the potential for high rewards despite higher risks
- EIS: A government program encouraging investment in small businesses by offering tax relief to investors who buy new shares in those companies
Due to the tax efficient nature of VCTs and EIS it makes them some of the best tax planning and investment strategies for high net worth individuals.
Example
Reema, a tech investor, is looking to diversify her portfolio while benefiting from significant tax reliefs.
She invests £100,000 in a Venture Capital Trust (VCT) and another £50,000 in an Enterprise Investment Scheme (EIS).
As a result, she gains 30% income tax relief, tax-free dividends, and capital gains tax exemptions, significantly reducing her tax burden while supporting high-growth startups.
Are venture capital schemes a tax efficient investment for additional rate taxpayers?
- Offer up to 30% income tax relief on investments in qualifying companies
- Provide exemption from capital gains tax on qualifying shares
- Allow deferral of capital gains tax when reinvesting in EIS schemes
- Support innovative startups with potential for high long-term returns
- Carry high risks but balance portfolios with tax-efficient opportunities
7. Working with a wealth management company
With the tax landscape evolving, partnering with a wealth management company can provide personalised advice tailored to your financial situation.
This collaboration ensures that your tax planning strategy is both compliant and optimally structured to meet your financial objectives.
Example
Mark, a busy executive, wants a tax-efficient, diversified investment portfolio wealth strategy but lacks time to manage it.
A wealth manager develops a holistic financial plan, incorporating trusts, tax-efficient investments, and estate planning to optimise his wealth.
This allows him to focus on his career while his assets grow efficiently with minimal tax exposure.
The benefits of working with a high net worth wealth planning firm
- Provide tailored tax and investment strategies for wealth preservation
- Help structure assets efficiently to reduce taxes
- Offer access to exclusive investment opportunities not available to retail investors
- Ensure long-term financial planning aligned with personal and family goals
- Manage complex wealth structures, including trusts and cross-border assets
8. Charitable giving
High net worth individuals can reduce taxes while supporting causes they care about through strategic charitable giving.
In many ways, this highlights how tax planning for high net worth investors isn’t just about saving tax for their own personal benefit. Charitable giving is about making discrete donations to worthwhile causes and projects, in a tax advantaged manner.
By donating through Donor-Advised Funds (DAFs), Charitable Remainder Trusts (CRTs), or Gift Aid, affluent, wealthy individuals can receive immediate tax relief.
Planned philanthropy can also help reduce inheritance tax (IHT) by ensuring that at least 10% of an estate is left to charity, reducing the overall IHT rate from 40% to 36%.
Example
David, a wealthy investor, donates £500,000 to charity through a Donor-Advised Fund.
He immediately claims tax relief on the donation, reducing his income tax bill.
Meanwhile, the money remains invested and continues to grow, allowing him to direct future grants to various charities while maximising tax planning efficiency.
How charitable giving is a positive tax planning strategy for high net worth individuals
- Reduce income tax through Gift Aid and higher-rate tax relief
- Lower inheritance tax by donating 10% of the estate to charity
- Use donor-advised funds for long-term, tax-efficient philanthropy
- Offset capital gains tax by donating appreciated assets instead of selling
- Align wealth with personal values while maximising tax benefits
9. Offshore bonds
For those with significant assets to protect, offshore bonds offer a valuable tax planning option for high net worth individuals.
Otherwise known as offshore investment bonds, they are a tax-efficient investment vehicle, allowing assets to grow free from UK taxes until funds are withdrawn.
These bonds, often based in tax-friendly jurisdictions, allow for tax deferral, meaning income and gains aren’t taxed until withdrawals occur.
Furthermore, high net worth investors can also use time-apportionment relief if they become non-UK residents. As a consequence, further reducing tax exposure.
Lastly, segmenting withdrawals ensures that funds can be drawn in a way that reduces income tax exposure.
Example
Sarah, a UK resident, invests £1 million in an offshore bond. Over 10 years, her investment grows to £1.6 million, but no UK tax is payable on this growth.
She later moves abroad for the qualifying period of time, during which she withdraws funds completely tax-free.
By taking advantage of time apportionment relief before returning to the UK, Sarah fully benefits from this tax planning opportunity for high net worth clients.
Why offshore bonds offer tax-efficient financial planning for affluent investors
- Allow investments to grow free from UK taxes until withdrawn
- Enable tax-efficient withdrawals through partial surrender strategies
- Offer time-apportionment relief for non-UK residents, reducing tax exposure
- Provide estate planning benefits by deferring tax liabilities
- Allow control over income timing to manage taxes effectively
10. Using loans as a Capital Gains Tax-efficient strategy
Wealthy individuals can use low-interest loans to access capital instead of selling assets and incurring capital gains tax (CGT).
If borrowing costs are lower than the potential tax liability, this strategy can be more cost-effective than liquidating investments.
Loans secured against assets such as stocks, property, or investment portfolios allow individuals to maintain ownership while deferring tax exposure.
This approach is particularly useful in high-growth investment environments, where selling would result in significant tax losses.
Example
John owns a £5 million investment portfolio that has significantly appreciated. If he sells, he faces £1 million in CGT liabilities.
Instead, he takes out a £2 million loan at 4% interest, using his portfolio as collateral. His annual interest payments are £80,000.
But, he avoids a large tax bill while keeping his investments intact and generating growth.
How low interest loans are a key factor in high net worth tax planning
- Provide liquidity without triggering capital gains tax on asset sales
- Allow wealth to remain invested while accessing capital efficiently
- Enable tax-efficient gifting strategies by loaning funds to family trusts
- Offer deductible interest expenses in certain structured loan arrangements
- Reduce inheritance tax liabilities by using intra-family loans effectively
Summarising the different tax planning options for high net worth individuals
For affluent individuals, tax planning is a critical component of accumulating wealth, mitigating, taxes and financial security.
By engaging in a detailed, professional planning process and taking advantage of tax-efficient investment opportunities, you can grow and protect your wealth and secure your financial legacy.
- Inheritance tax planning is vital to mitigate unnecessary taxes
- Tax efficient vehicles should be exploited to reduce and offset taxes
- Pensions can be use to reduce income and corporation taxes
- Creative tax planning for high net worth clients also use low interest loans to defer CGT
All in all, hopefully the suggestions in this article, offer solid insights into tax planning for high net worth individuals.
FAQs
Need a quick recap?
Here are a handful of answers to some questions you may have after reading this article.
What is the best way to reduce inheritance tax?
Investing in assets that are eligible for reliefs, making lifetime gifts, and using trusts effectively can reduce inheritance tax expenses.
How can trusts benefit my tax planning?
Trusts can reduce taxes and provide controlled distribution of your assets according to your wishes.
Are pensions tax-efficient for high net worth individuals?
Yes, maximising pension contributions can reduce taxable income and provide significant tax relief.
Can my business reduce tax by paying into my pension?
Absolutely, company pension contributions can lower corporation tax while building your retirement savings.
What are VCTs and EIS, and how do they benefit me?
These are investment schemes offering tax reliefs to encourage investments in small businesses, with advisement recommended due to higher risks.