High net worth individuals (HNWIs) are defined as those people who have a personal wealth in excess of £250,000. According to the Financial Times, 47 per cent of NHWIs have directorships; 81 per cent are male; their average income is £223,508 and average net worth is £1,080,684. Many HNWIs are new to money and require assistance in managing their finances.
One of the biggest challenges for HNWIs is reducing tax liabilities, while not breaching tax law. All HNWIs are higher tax payers; which means a 50% tax rate is applied to all their earnings. Good tax management can greatly reduce the annual tax bill to HMRC.
Managing investment risks
A large part of managing HNWIs is tax planning. However, high net wealth management also provides advice on and the administration of inheritance tax, divorce and matrimonial issues, family governance and trust accounts, which helps to reduce tax risk later in life for dependents. Good planning can pay dividends.
During the last decade HNWIs have become much more wary of more traditional stock market investments following the credit crunch and stock market crashes that followed. Instead, they are now looking for much safer investment opportunities where risk is well managed to limit losses.
It is, of course, natural for wealthy individuals to invest much of their income. Money kept in cash savings tends to lose value over time as interest rates are below inflation. Property, the stock market and money markets are where most wealth is invested. However, they can be very risky and good financial advice is vital to ensure that income is not squandered on risky investments. Many people have lost their fortunes on the stock exchange, especially since the credit crisis.
Financial planning with risk management is essential to ensure an investment will gain in value over time. While some risk has the potential to return bigger gains, it is always important that a majority of wealth is kept in the safest investments, such as bonds, property and cash.
Tax efficient ways to protect wealth
It is important to note the difference between tax avoidance and tax evasion. Tax avoidance is the process of legally reducing the amount of tax that is payable by taking advantage of tax benefits. These are not suitable for those on lower incomes, but do provide savings for high net worth individuals. Tax evasion, on the other hand, is the illegal avoidance of paying tax by hiding or simply not declaring income. This is illegal and can result in hefty fines and even imprisonment.
A legal and effective way to reduce the tax burden is to utilise offshore structures and new pension products such as Qualifying Recognised Overseas Pension Schemes (QROPS) and Qualified Non-UK Pension Scheme (QNUPS). UK tax payers can claim tax relief on pension contributions; however, the annual allowance for pension contributions is £50,000 and anything over this figure is subject to tax. Offshore pension plans provide a way to invest more for the future and pay less tax now. Receiving good tax help should be a priority for all high net worth individuals.
Companies to help with wealth advice and management
Fortunately, there are many companies that specialise in providing this service. While HNWIs represent a very small part of the market they are very highly sought after clients by investment companies and wealth managers.
The best companies have strong relationships and partnerships with companies in locations such as Guernsey, Jersey and the Isle of Man, which provide services to aid with tax avoidance and reduction.