You've likely worked very hard to build your wealth over time. As your income, investments, property, business interests, or other assets grow, you may have to consider if the way you manage your tax affairs needs to change too.
At some point it's worth considering if you're confident that you're making full use of all legitimate tax-planning opportunities that are available to you? Have you also thought about what could happen to your wealth when you eventually decide to pass it on?
The reality is the more wealth you accumulate, the more complex the financial decisions you face may become. Unfortunately, that means the consequences of getting those decisions wrong can grow with your wealth.
That's where tax planning comes in, it's about looking ahead as opposed to calculating tax after something has happened. It means understanding the potential tax implications of your decisions before you actually make them. Consider how and when you receive income, sell or transfer assets, realise the value of investments, extract money from a business, plan for retirement, or pass on wealth to the people that matter to you.
Good personal tax planning isn't about taking unnecessary risks to pay less in tax. It's about understanding the legal tax options available to you so that you can make informed decisions that help protect what you've built, now and in the future. On this page we look at how personal tax planning works, when you need to think about it, and how advice can inform decisions today that make a difference in protecting your wealth for tomorrow.
Here are some quick links to the various sections covered by this page:
Personal tax planning is different from tax compliance. It's a matter of looking at your current and future financial affairs to understand what the potential tax implications are of the decisions you're weighing up before making them.
Completing a tax return in general requires looking backwards at income, gains, and transactions that have already happened. The tax owing is then calculated from that information. Personal tax planning is far more about looking forward. It takes into account what you're trying to achieve and combines that with how the structure or timing of a decision could result in different tax scenarios and outcomes.
For examples of this, you might be considering:
In many of these cases, you may have several options available to you. Each is likely to have different financial and tax consequences. Good personal tax planning enables you to understand those consequences in full before you commit to any course of action.
Ideally you start personal tax planning before you face a significant financial decision, as opposed to after you've already made it.
Consider that once you've sold an asset, extracted money from your business, made a transfer of wealth, or completed a transaction, most of the planning opportunities that were available beforehand will likely now be lost.
We'd suggest you don't wait for a major event either. Personal tax planning is likely to be increasingly valuable as your financial affairs accumulate with wealth and your circumstances become more complex. So, consider seeking advice when:
You don't need to know what a solution, or solutions, could be before speaking to an advisor. We find that in many cases the options available to you, and the solution you're contemplating are the reason for starting a conversation.
Is tax planning something you do once?
Not necessarily! It depends on your individual circumstances.
It's likely that your income, assets, family circumstances, and priorities will change over time, and tax regulations can change too. Strategies that made sense years ago may no longer be applicable today for what you're trying to achieve.
This means personal tax planning can be more valuable when it's treated as an ongoing process that's usually reviewed regularly before the end of the tax year, instead of a one-off exercise. Being a process means you can review where you are now, consider your options and decisions as you look ahead to what you want to happen concerning the wealth you've accumulated.
Ultimately when it comes to tax planning, an earlier conversation can often provide you with more options.
There are various ways you can legally reduce the amount of tax you pay, but the right approach depends on your individual circumstances namely your:
Tax legislation is vast and complicated, but it does provide various allowances, reliefs, and exemptions that you may be able to make use of dependent on if you qualify for them. Planning also often involves considering the timing and structure of financial decisions so that you're able to understand the tax consequences before acting.
This could potentially include looking at:
Just remember that just because something can reduce your tax liability doesn't automatically make it the right decision. As an example, you may give away an asset for potential tax advantages but that could be very problematic if you then need it, or money from it later. Also changing the ownership of an asset can change its tax treatment. That may also then result in financial, legal, and family relationship consequences.
Effective tax planning takes all these trade-offs into consideration.
Tax planning isn't tax avoidance or evasion
It's vitally important to understand that there's a very clear distinction between legitimate personal tax planning, tax avoidance, and tax evasion.
Tax evasion is the act of deliberately breaking the law to conceal taxable income or provide false information. That is illegal.
Tax avoidance often involves making use of legal rules to obtain a tax advantage in a manner that appears to operate within the legislation but is not within the 'spirit of the law'. Often such arrangements are challenged by HMRC, and where this is successful, can result in fines and penalties arising.
Personal tax planning doesn't involve taking those kinds of risks. It's about understanding the legitimate choices available to you and making sensible decisions within the rules.
We suggest you shouldn't just be looking to pay less tax. Instead start by asking yourself what you're trying to achieve, and what's then the most appropriate way of achieving it.
As mentioned earlier on this page, consider talking to a tax advisor before making a significant financial decision that might result in a tax liability or even change the way your income, assets, or wealth are taxed.
It's important to remember that once a transaction is completed, an asset sold, or ownership transferred then it may be difficult, or even impossible, to change what you've done from a tax perspective. Advice prior to the event provides you with an opportunity to understand the potential tax consequences whilst also considering the other options available to you.
Tax advice can be particularly valuable when you're:
Why getting advice beforehand matters
The reason is that the same financial objective can sometimes be achieved in different ways, and each route can have different tax consequences.
As an example you may find yourself wanting to help a young adult financially in your family. You might then consider giving them cash, or transferring an asset to them, or even help them acquire a property. So, your objective may be exactly the same in each case; helping your younger family member. However, the tax treatment, financial, and practical consequences can be quite different in each scenario.
Talking to a tax adviser can help you understand those differences and what they mean before you commit to one path. Remember also that tax should never be considered in isolation. Just because an option results in the smallest immediate tax liability, it doesn't necessarily mean that's the right course of action. As the saying goes, 'the tax tail shouldn't wag the dog'.
A course of action that results in a lower tax bill may for example require you to give up control of an asset, restrict your access to money you could need later, or create challenging consequences elsewhere in your financial affairs. That's why a good adviser will likely ask you first, 'What are you trying to achieve?'
Only once that's established should the conversation move to how tax affects the options available to you.
Capital Gains Tax (CGT) becomes increasingly relevant as you accumulate assets that can increase in value such as:
As a general guide, CGT may be payable where you sell an asset that has increased in value since you purchased or acquired it. That then means it's the gain you made rather than the total amount you receive that's relevant for CGT purposes.
You should also probably note that a disposal doesn't necessarily mean selling something either. This is circumstance dependent but giving away or transferring an asset can also have tax consequences. So you'll likely need to consider CGT when you're:
Can you reduce CGT?
There may be legitimate allowances, reliefs, or even planning opportunities that are available to you depending on the asset, your financial circumstances, and what you're trying to achieve. Timing can also be a factor.
That's why we'd suggest it's essential to understand your CGT position first before making any disposals, otherwise the danger is you discover the tax consequences afterwards when it's too late to plan around them.
Remember that the principles from the prior section still apply, reducing CGT shouldn't necessarily be your sole objective. After all, you wouldn't want to remain stuck with an unsuitable investment just because selling it results in a tax liability. Conversely, giving away an asset to achieve a tax outcome would make little sense if you still need the income, value, or control that asset provides.
So rather than asking, 'how do I not pay CGT?' maybe you need to think about what you want to do with an asset, what are the tax consequences of the options available to you, and which route makes the most sense to your circumstances and goals.
That's what can make tax planning so valuable.
Passing wealth within your family tax-efficiently requires consideration as to:
The point is you don't have to wait until death to transfer your wealth. This means there are options available to you including potentially:
Before deciding on any of those things we'd suggest you consider the following questions:
| How much of your wealth can you afford to give away? | Could transferring an asset result in other tax consequences? |
| What might your cash requirements be in later years? | How might your financial needs change in later life? |
| Are you comfortable giving up ownership and control? | What do you want to remain within your estate? |
| Who do you want to benefit, and when? | Can I legally transfer the asset now? |
You'll notice that this is where tax planning and family planning become interconnected.
Should you pass on wealth in your lifetime?
Again, this depends on your circumstances and goals. For some people making gifts during their lifetime acts as a sensible part of their estate and inheritance tax (IHT) planning. You may also enjoy the satisfaction of seeing family members benefit from your wealth when they need it. Just remember that giving something away is a significant financial decision.
Once ownership has passed onto someone else, you'll likely no longer have control over that asset or be able to rely on it should you financial circumstances change.
Also, be sure to remember that there's likely to be tax consequences beyond IHT. It depends on what you transfer and how you do it, but other taxes such as CGT need to be considered. So perhaps the question shouldn't just be, 'how much can I give away to reduce Inheritance Tax?'
Also question, 'What can I afford to pass on without compromising my own financial security, and what's the most appropriate way to do it?'
A tax advisor can help you comprehend the different options and how they may impact both you, and the people you want to benefit.
Remember that a tax-efficient transfer isn't really about giving away as much as possible, as early as possible. Instead it's about finding an appropriate balance between enjoying and protecting your wealth which you'll need during your lifetime whilst passing on what you can to the people who matter to you.
Exploring IHT implications can help you understand what could happen to your wealth when you pass away. You can also then decipher the steps you can take during your lifetime to pass on more of it to the people or causes you care about.
For many people their estate develops gradually over time. Property is likely to increase in value, investments can accumulate, pensions and savings may grow, or a business you've spent years building becomes increasingly valuable. This can result in an estate worth considerably more than they once expected.
IHT planning commences by understanding what you own, how those assets are held, who you want to benefit, and what your estate could look like in the future.
Planning can involve considering:
When do you need to start IHT planning?
You don't need to wait until later in life to commence planning about IHT. Indeed, leaving the conversation too late can reduce the options available to you. Remember that some planning strategies take time to implement and become effective. Others involve decisions about assets that you want or need to retain. Starting early provides you with ample time to understand those trade-offs without feeling pressured into making decisions based on a looming deadline.
Your estate plan shouldn't only consider what you want to leave behind. It also needs to continue protecting the life you want to live.
Is IHT planning only about reducing tax?
Taxation in only one part of good estate planning. You have to consider who will receive some of your wealth, when should they receive it, how comfortable you are with giving up control, and how these decisions impact on your family.
Sometimes the most tax-efficient option may not be compatible with what you actually want to happen. This means the question can't necessarily begin with, 'how can I avoid inheritance tax?'
Instead, 'what do I want to happen to the wealth I've built, and how can I plan for that in a sensible and tax efficient manner?'
Giving assets away in your lifetime or retaining them in your estate will depend on your financial circumstances, the assets you hold, who you want to benefit, and how much control or access you're willing to impart.
Giving wealth away earlier can have advantages. Doing so can help your children or other family members at a time when they need it most, and doing so is likely to reduce the value of your estate. But, that doesn't mean giving away assets is the right decision for you.
You need to consider what such actions will mean for you.
What should you consider before making a gift?
Perhaps start with the purpose you're trying to achieve, rather than the tax.
You may want to help a family member purchase their first home, you may want to provide money for your grandchildren, transfer an investment property, or pass ownership of family wealth to the next generation. Through clarity on what you're trying to achieve you can then consider how the different means of going about it can affect both you and the recipient.
Timing can also play a part. Different types of gifts and transfers can have different tax treatments. Some IHT considerations depend on what happens in the years following a gift. So, that's another good reason to seek tax advice before transferring any ownership instead of dealing with the consequences afterwards.
There's also the practical consideration that once you've given something away, it isn't yours anymore. Don't make yourself financially vulnerable just to achieve a future tax saving.
Don't want to give up control?
This question can lead to the path of setting up trusts or different ownership arrangements such as Family Investment Companies (FIC's). Such options can be useful, but they do also bring tax, legal, and administrative requirements. Don't necessarily view them as the automatic way of having the best of both worlds.
Ultimately the decision isn't, is it more tax-efficient to give this away now or leave it in my estate? It's more a case of, what do I want to do with this wealth, what should it achieve, what do I need for myself, and what are the consequences of transferring it now rather than later?
The answers to those questions mean tax planning can then be applied to help you understand which route is most appropriate to your aspirations.
Sometimes a trust can help manage, protect, and enable you to pass on assets to other people without the need to give those assets to them outright today.
For the purposes of clarity, a trust is a legal arrangement where assets are held and managed by trustees for the benefit of one or more beneficiaries.
They can be useful for certain family and estate-planning scenarios. You may, for example, want to provide for your grandchildren but don't want them to receive substantial assets immediately. You may also want control over how and when your wealth is distributed, provide for someone who is vulnerable, or protect your assets for future generations.
It all depends on your circumstances, a trust is therefore particularly helpful when you want to:
Can a trust reduce your tax bill?
Potentially, yes it can, but we'd suggest that a trust shouldn't be viewed as an automatic means of avoiding or reducing your tax exposure.
There are different types of trusts, and they can have different tax consequences. It all depends on the arrangements put in place. There may be Income Tax, Capital Gains Tax, and Inheritance Tax considerations for assets being placed in a trust for eventual distribution.
This can also come with ongoing reporting, administration, and professional expenses.
This is why we'd advise that establishing a trust simply because you've heard it can be tax-efficient is unlikely to be a sensible starting point.
When is a trust most likely to be appropriate?
You first need to consider if a much simpler arrangement can enable you to achieve what you want.
Are you comfortable giving assets to family members directly? Might the additional control and protection provided by a trust not be necessary? Or are the tax consequences, administration and restrictions involved likely to outweigh the benefits based on your circumstances?
Importantly, you need to understand that putting an asset, or assets, into a trust changes the way it's owned and controlled. So, perhaps start with the following questions:
Who do you want to benefit?
What do you want them to receive?
When exactly do you want them to benefit from this?
How much control, or protection, do you want surrounding those assets?
What is your family likely to need in the future?
Answers to these questions can provide the necessary insight as to the most appropriate means of achieving your objectives.
If you own a business, then yes, they probably should alongside one another. The reason being the decisions made in one can have consequences for the other.
Your business can over time become one of your biggest assets! It may provide most of your income today, representing a significant part of your wealth that you'll use eventually to fund a retirement or pass on to your family perhaps. This then establishes an important connection between what you want for the business and what you want personally. Examples include:
If you take these points in isolation then you risk potentially missing the bigger picture.
What exactly do you want your business to do for you?
As your business develops and grows, so your priorities may change. At an early phase you may well have been focused on reinvesting most of what your business generated so as to fund future growth. Later in the business lifecycle you may begin to ask different questions such as:
How much income do I need from the business?
How much money should remain invested in it?
How dependent is my personal financial future on the business?
Can I step back at some stage but retain an interest?
Do I want to sell up or pass it on to somebody else?
What would an eventual exit mean for me and my family?
This is often a mix of business and personal circumstances that need to be considered. So, we think professionals who advise your business and those that advise you personally should understand what you're trying to achieve from both.
Tax decisions shouldn't drive business decisions and direction
This principle is well established on this page and also very applicable here. Some courses of action may appear beneficial from a tax perspective but leave your business vulnerable, for example having enough capital to reinvest. Alternative options may make sense commercially but have consequences for your personal finances or estate.
So you really need to understand the trade-offs before making any decisions.
As a useful starting point, your business plan and personal financial plan shouldn't exist in separate worlds. If much of the wealth you've built sits within your business, decisions about its commercial future are also decisions about yours.
Not having a personal tax plan doesn't necessarily mean you're paying too much tax. What it does risk is financial decisions being made in isolation, without considering how they fit together or what the long-term consequences could be.
You may complete and file your tax returns correctly, plus pay for everything that's due. But remember that compliance generally looks back and deals with events that have already happened. Where this is the case, decisions can be very difficult to change.
If you're not looking ahead, you could potentially:
None of this results from doing things intentionally wrong. Instead the issues arise from not asking the right questions early enough.
What's the cost of leaving tax planning until later?
The cost isn't something you can easily put a figure on. It may be tax that might have legitimately been reduced with earlier planning. Or, it may be a lost opportunity, an irreversible decision, or discovering something you intended to do with your wealth or finances that's now far more difficult to achieve.
You may have spent decades building a business, accumulating property or investments, and providing for your family. If you only consider how everything fits together when you want to exit your business, retire, or pass on substantial wealth then sure you may still have options available to you. However, you may have considerably fewer options than if those conversations had started years earlier.
That's the real risk of not having a plan in place early on.
Tax planning and predicting the future
You can't plan in full for all the scenarios that life may send your way. You can't know exactly what your income, family situation, investments, tax legislation, or priorities will look like years from now.
A personal tax plan shouldn't be designed to lock you into a rigid course of action.
Instead it's there to help you understand where you are today, what you're trying to achieve, significant decisions that may be approaching, and ensuring the plan can change with your circumstances. Good tax planning is therefore largely about giving you options for whatever the future may hold.
The cost of personal tax planning will vary according to the complexity of your financial affairs. It'll also be influenced by the decisions you're facing, and the amount of work required to understand and advise you based on your circumstances.
Advice in relation to a straightforward tax question may require little professional work. Planning that involves several assets, business interests, family members, property and your wider estate is likely to require many more hours of high-level work.
The cost may also depend on whether you need:
Your advisor should explain what work they recommend, why they believe it's necessary, and what the charges are before any work commences.
Personal tax advice is likely to be particularly valuable when the financial consequences of a decision are significantly greater than the cost of the professional advice needed before making it.
So, it's not just about identifying tax savings. Advice can help you:
This means the value of the advice can become greater as the decisions you face become more significant.
If you're selling a valuable asset, transferring substantial wealth, changing ownership of your business, making a large gift, or making decisions that affect your estate, paying for advice beforehand can provide much-needed clarity about the consequences of your options.
Is more expensive tax advice necessarily better?
No, not necessarily.
Your payment should be based on relevant skills, knowledge, and advice that's appropriate to your circumstances. You don't want complexity for complexity's sake.
We'd suggest caution if an advisor appears more interested in selling you a particular tax strategy or scheme above what you're actually trying to achieve.
Sometimes good advice can result in a surprisingly simple solution or recommendation. Sometimes advisors will tell you not to do something which can be extremely valuable in itself.
This means the value of good tax advice isn't just measured by how much tax it saves. It can also be measured by the mistakes it helps you avoid, and the confidence you have from it to make an informed decision.
Choosing your tax advisor is often about finding someone who can do far more than just complete your tax return.
If you've accumulated significant assets over time, have business interests, or are thinking about how to protect and eventually pass on your wealth, you'll likely need an advisor who can help you plan ahead and not just deal with what's already happened.
Before choosing someone, we recommend you ask the following kinds of questions:
What should you expect from a good personal tax advisor?
A good tax advisor in our opinion will look to ask questions and listen intently before offering any answers.
After all they need to understand what you own, and how your affairs are structured. They also must understand what you're trying to achieve.
Perhaps you're looking to retire in the next few years. Or maybe you're hoping to sell your business or property. You may want your children or family to benefit financially, protect your own future income, or commence planning for what eventually happens to your estate.
The point is context is absolutely critical, your objectives frame the narrative, options, and rote for tax advice.
You'll also likely want a tax advisor who can explain what can be very complex matters at times, in language that is clear, precise, and easily understandable. They'll also need to explain risks, trade-offs, and the potential benefits involved.
Remember that more complicated advice doesn't necessarily mean you benefit from better professional work.
Sometimes the most apt answer is a relatively straightforward one. Other times it may be about waiting. Like all good relationships trust is likely to be built around honesty, so a good advisor will also likely inform you that a strategy you heard about isn't going to be appropriate to your circumstances.
Looking beyond the tax return
If you find most of your conversations with your tax advisor happen after the tax year has ended then ask yourself if you're receiving tax planning, or predominantly tax compliance.
Of course, both matter but they perform different duties.
Compliance is about making sure your tax affairs are dealt with correctly. Planning is about understanding the options available to you and the potential consequences of future decisions whilst you still have choices available to you.
A tax advisor offering the all-encompassing service won't just tell you how much tax you owe. They will help you understand the decisions you're contemplating and how these impact on the wealth you've worked so hard to build.
In your first meeting with an advisor, we'd suggest you impart the following essential information:
The more relevant information you're able to share, the easier it is for an advisor to see how the different elements of your financial affairs fit together. So, you may include information about:
Consider also bringing relevant tax returns, accounts, investment information, and details of existing arrangements where you have them.
You don't have to arrive at the first meeting bringing absolutely every document, the key is the conversation is just as important as the paperwork.
Talk about what's coming, not just what's happened
A good advisor will likely want to know what's likely to change moving forward.
So, you should talk openly about your plans and concerns. This doesn't mean arriving knowing exactly what kind of product or service you need, such as I need a trust or I need an Inheritance Tax strategy. But a good starting point is to state where you are today, what you want to achieve and enquire as to what you need to be thinking about.
An advisor then needs to ask you the right questions, understand your position, and help you identify where advice and planning may be needed.
What do you want your wealth to do for you, your family, or anyone else?
You've worked hard to accumulate what you have. The next question isn't just about protecting it from unnecessary tax, it's also about what you want that wealth to enable you to do.
You may want greater financial security and the freedom to enjoy what you've built. You might want to retire earlier, travel more, step away from your business, or simply know that you have enough for whatever life brings. You may want your wealth to help other people whereby the assets you've accumulated eventually pass to the people or causes that matter to you.
There's no one right answer. Your answer may also change as your life, family, and financial circumstances evolve.
It's for this reason that good personal tax planning shouldn't in our opinion begin with a tax-saving strategy. It should begin with a conversation about what matters to you.
Only once that's understood, can you consider how your income, assets, business interests, investments, and estate all synchronise together along with how the tax implications of the decisions you make today could impact on what you're able to achieve tomorrow.
The purpose of personal tax planning isn't simply to preserve as much wealth as possible. It's to help you make informed decisions about how you use, protect, and eventually pass on what you've built.
Please also be aware that information provided on this page is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this website.
I have always found the Wellers team to be responsive, insightful, hardworking and solutions orientated. No question is too difficult nor task too hard. Whether it is asking for advice, or exploring challenges that are not so obvious, Wellers are very professional, and will put themselves in your shoes to give the best possible and rounded service. I have no hesitation in recommending them.
Miranda Grubb, Co-Founder of Lizard Orchid
