High Net Worth Individuals

What is a High Net Worth Individual?

There is no precise definition of a high net worth individual. In the UK, Her Majesty’s Revenue and Customs (HMRC) amended their definition of a High Net Worth Individual in 2016 and anyone with assets valued in excess of £10 million was categorised as such.

The previous threshold was £20 million. The UK does not have a native benchmark for determining an Ultra High Net Worth Individual. The generally accepted ultra high net worth definition which has been adopted is that of the US which categorises an Ultra High Net Worth individual as someone with investable assets (assets excluding their main residence and personal effects) of at least $30 million (£23.4 million).

Is there a minimum Net Worth for Private Wealth Management?

There is no universal minimum net worth for Private Wealth Management and the entry point for accessing wealth management services will be determined by each provider of wealth management services. 

The services that will be provided and the associated costs of those services, will vary significantly from firm to firm. 

At The Private Office we offer three levels of ongoing services ranging from a basic service which is suitable for meeting the needs of a new investor through to a fully bespoke service for clients who require specialist support due to their level of investable wealth and the need for more sophisticated tax planning strategies. 

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What is a “Tax Minimisation Strategy”?

Once your financial adviser or wealth planner has established your personal financial circumstances and your financial goals, they will construct your personal financial plan. As well as considering your appetite for investment risk and your ability to tolerate investment volatility and absorb losses your wealth planner will be considering how best to invest your capital to minimise the impact of tax. 

A robust tax minimisation strategy will ensure that you are making best use of all the available tax planning allowances and exemptions to enhance the overall tax efficiency of your portfolio. This is a legitimate means of reducing the tax you pay. 

Individual Savings Accounts (ISAs)

Perhaps the most well-known tax efficient investment is the Individual Savings Account or ISA.

If you are an adult residing in the UK, you can invest £20,000 each year into an ISA either as a cash ISA, stocks and shares ISA, innovative finance ISA, Lifetime ISA, or a combination of the four. Any income or capital gains arising from an ISA are free of both income and capital gains tax. 

If you have children you can invest on their behalf on a Junior ISA which has the same tax benefits as an adult ISA albeit with a lower annual subscription limit, currently £9,000 per annum. A JISA automatically converts to an adult ISA when your child reaches age 18 and they have full control over the investment from that point forwards. Please note, children with a Child Trust Fund (CTF) aren't eligible for a JISA unless their CTF funds are first transferred to a JISA and the CTF closed.

Pensions

Funding a pension is another great example of adopting a tax minimisation strategy as you receive income tax relief at your marginal rate of income tax on personal contributions paid during the tax year provided these do not exceed the prevailing limit.

The maximum amount you can contribute and benefit from income tax relief is the higher of £3,600 and your relevant UK earnings (such as salary and bonus). There is also a cap of £60,000 called the annual allowance which takes into account contributions from all sources, employer included. If the annual allowance is exceeded, you will be taxed on the excess. 

However, care needs to be taken if you have ‘adjusted income’ (includes all taxable income: salary, bonus, P11d, employer and salary sacrifice pension contributions, dividends, interest) above £260,000 as your annual allowance is reduced by £1 for every £2 of excess income. The maximum reduction is £50,000, resulting in a minimum annual allowance of £10,000.

To be affected, your ‘threshold income’ must exceed £200,000 (this is total taxable income as above but excluding all pension contributions (but including income sacrificed for employer pension contributions under salary sacrifice agreements put in place from 9/7/15 onwards)).
If you are eligible, you can carry forward any unused allowance from the three previous tax years to increase your annual allowance in the current year, subject to certain conditions. 
 

Understanding how much you can pay into a pension, particularly if you have income over £200,000 and/or are a member of a final salary pension scheme, can be complicated. If would think you may be affected by the tapered allowance speak to a financial adviser. 

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In addition to the relative income tax benefits explained above, any income and capital gains generated by the investments held within your pension accumulate tax free. The funds held within your pension are also generally free from inheritance tax.

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Investment Accounts

Once you have fully funded your ISA and pension allowances you may wish to consider saving into a General Investment Account. 
Unlike an ISA or Pension, capital gains, interest and dividends arising from an investment account are taxable. However, you are able to claim certain allowances and reliefs against these taxes each year: 

Personal Savings Allowance and Dividend Allowance 

In addition to your Personal Allowance you also receive the following income tax allowances: 

Dividend Allowance 2024/25 

• £500

As the name suggests, the dividend allowance only applies to income you receive in the form of dividends.

This means that you can receive income of up to £500 from shares and some equity-based collective investment funds without paying any tax. This is also a useful allowance for business owners, who can pay themselves a tax-free income of £500 in the form of a dividend.

Once the dividend allowance has been fully utilised, any dividends received will be taxed using the following rates:

• 8.75% for basic rate taxpayers
• 33.75% for higher rate taxpayers
• 39.35% for additional rate taxpayers

Personal Savings Allowance 2024/25

• £1,000 for basic rate taxpayers
• £500 for higher rate taxpayers
• Nil for additional rate taxpayers

The personal savings allowance applies to savings interest and income from some collective investment funds. It allows you to earn a small return on your cash savings and fixed interest investments without the need to pay tax.

Capital Gains Annual Exemption

Capital Gains Tax (CGT) is the tax due when you dispose of assets that have increased in value. Disposing in this context can mean the selling or gifting of assets. Everyone is entitled to a tax-free CGT exemption of £3,000 in 2024/25, after which any further capital gains are taxed at the following rates:
 

Your annual CGT exemption is a ‘use it or lose it’ exemption, meaning that any unused amount cannot be carried forward to be used in a future tax year. This makes it important to ensure that you are using the exemption each year where possible to gradually reduce any capital gains in a tax efficient manner. 

Where you are married or in a civil partnership, you have the opportunity to double the CGT exemption available to you. This is because transfers between spouses are exempt from CGT, meaning that you can pass assets between husband and wife or civil partners to use both CGT exemptions. Any transfers must be genuine and unconditional gifts from one party to the other.

If you have previously made a loss when disposing of an asset, this can be used to offset any future capital gains. Losses must be claimed from HMRC within the 4 tax years after the tax year in which the loss occurred but, once claimed, can be carried forward indefinitely to offset future capital gains.

Reducing your tax bill with tax-relieved investments

An investment into a qualifying Venture Capital Trust (VCT), Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) attracts significant tax benefits.

These investments were created by the government as an initiative designed to help small and medium sized companies raise finance by offering tax benefits to investors.

Given the type of companies they invest in, they are perceived to be high-risk investments and it is therefore important to seek professional financial assistance when considering an investment of this type. 

It is worth noting that the regulator of financial services in the UK, the Financial Conduct Authority, has placed marketing restrictions around these types of products and has its own definition of a High Net Worth Individual in this context.

To be eligible to receive information and invest in these types of products under the High Net Worth investor exemption you need to meet the following criteria:

• Had, during the financial year of investment, an annual income of £100,000 or more 
• Held, throughout the same year, net investable assets of £250,000 or more
• Have sufficient relevant knowledge and experience of investing to understand the risks 

The definition of investable assets also excludes the value of your pension funds and proceeds from a life assurance contract. A separate exemption is available for sophisticated investors. 

Example of tax planning strategies for High Income Earners

If you are eligible, some of the main tax benefits associated with qualifying investments are shown below:

Family Investment Companies 

For ultra-high net worth individuals with a large estate, setting up a Family Investment Company may be appropriate. A Family Investment Company is a private investment company most typically used for family succession planning. The directors and shareholders of the company are individual family members or trusts.

The constitutional documents and Articles of Association for the company are drawn up with a number of share classes and the directors have the ability to decide which class of shares should receive capital or income and when they should do so. There is no automatic entitlement to either capital or income for any shareholder. Typically, the founder shareholder will have a different share class to other family members.

Powers in relation to the appointment of directors and investment advisers can be granted solely to the founder to enable them to retain control of family wealth. The internal tax treatment of a Family Investment Company can be attractive as dividend income is generally received tax free. FICs with annual profits over £250,000 are taxed at the normal corporation tax rate of 25%, however if profits are below £50,000 this drops to 19% due to the ‘small profits rate’. Between these two limits, FICs marginal relief provisions will apply to bridge the gap between the two rates.

The benefits of working with a financial adviser

In recent years HMRC has become progressively more focussed on the planning that High Net Worth Individuals undertake to mitigate tax liabilities. Most recently HMRC has turned their attention to individuals they have labelled ‘affluent individuals’. 

To qualify as an ‘affluent individual’ you only need to be in receipt of an income of at least £150,000 per annum or have accumulated wealth of £1 million or more. This brings a large number of people into scope for enhanced scrutiny of their tax affairs and the planning, they undertake to reduce tax liabilities. 

Investing is not the only option for wealth management and the steps which are taken to mitigate the impact of tax and legislation will be driven by your personal circumstances and the financial goals you wish to achieve. Although tax is an important consideration it should not overshadow sound planning principles.

Cash flow analysis is a good foundation step in formulating your financial plan and the best cash flow forecasting software incorporates the impact of all of the main UK taxes on your portfolio. 

Working with a financial adviser who is familiar with the challenges facing high net worth individuals and who has a good level of understanding of all the available allowances and exemptions, as well as the plans and products available to help mitigate tax, is essential for financial well being. 

Our advisers have decades of experience advising high earners and high net worth individuals in all stages of life. If you would like more information get in touch today and arrange a free consultation. 

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Please note: The Financial Conduct Authority does not regulate tax advice, cash flow planning, estate planning and Inheritance Tax Planning. The value of investments can fall as well as rise. You may not get back what you invest.