How to reduce your tax bill

Lowering your tax bill should be right up there at the top of your financial to do list.

I know what you are thinking. Tax is boring boring boring with three capital Bs.

But dare I say that’s not the right way of looking at things. I like it to reframe tax reduction as money making. Still boring?

Well, I’m pretty sure it wouldn’t be if you got done for tax evasion.

That wouldn’t be boring at all. That could involve a lot of money (in fines), a lot of quality time (in court) and a lot of new acquaintances (that you meet in prison).

OK that’s a bit extreme, but at the same time people get done for tax skulduggery each and everyday.

I’m sure that’s a big reason why many people don’t like getting too wrapped up in their own tax affairs.

Instead they follow two golden tax rules religiously. Rule one. Don’t talk about tax. Rule two. Don’t try to evade it.

And whilst I agree with the second one, the first one might not be the best way to grow your wealth.

After all, that’s what we are really talking about here.

Saving money (through taxes) is quite simply one of the most legitimate ways out there to make money.

Some manage to make a lot of money do it.

OK, let’s get into it. This week we are going to cover eight tax reduction strategies that anybody can use:

Choose capital gains over income

Was it Churchill who said ‘Poor people pay income tax, whilst the rich enjoy capital gains.’ Probably not, but there’s a vitally important financial lesson in there from whoever did.

We all know there are two key ways to make money. Income is one. The price of things you own increasing is the other.

But here’s how they differ. Not only is capital gains tax usually lower than income tax, most of the time you don’t need to pay it.

You only pay when realising a gain ie selling something for a profit. And here’s the key to this. Just because you haven’t realised the gain doesn’t mean you don’t get to enjoy it.

The number one reason is that you can lend against gains tax free. The most obvious example being a mortgage. Use £25K and £75K from the bank to buy a £100K house that increases in value to £200K and then go back to your mortgage company. They should let you borrow £150K now ie an extra £75K.

Did I mention the fact that this is tax free. This is why you hear about people like Elon Musk buying stuff with bank loans. People like Elon have all the money they’ll ever need. They don’t need a loan from anybody. They do it to evade I mean avoid, sorry I mean reduce the tax they pay.

Tax sheltering

Everybody should maximise any tax sheltering they have available. This seems like a no brainer. But the stats, at least in the UK, show that people simply don’t do it.

Many places have tax sheltered investment and savings accounts. The big ones in the UK are ISAs and SIPPs. Across the pond IRAs and 401(K)s seem to crop up all the time in things I read. But plenty of other countries have them too.

In all likelihood there will be something along those lines wherever you live.

Avoid Dividends

Many people like the idea of sitting on their behinds waiting for dividend checks to appear in their brokerage accounts. But here’s the thing. That’s almost never the best way to grow your wealth.

You see dividends attract tax twice. Most countries levy a withholding tax on dividend payments. Typically somewhere between 5-35%. It depends what countries shares we are talking about here and where in the world you live.

One person living in one country can end up paying more tax from their dividend than another person living in the same country simply based on their nationality.

That same person might be able to reduce the amount of tax they pay simply by moving country or choosing to buy another fund. (More on this below under domicile).

No matter which camp you fall in to the fact of the matter is this. Once you’ve paid your withholding tax, you then have whatever tax you need to pay in your country of residence on dividends.

Not to mention the fact that dividends can be a sign that the company in question isn’t the best way to grow your wealth anyway.

You see a company’s share price usually reduces right after a dividend is paid out. And more often than not, a dividend tells us that the company is no longer growing.

At the end of the day, if there was decent growth to be had, they wouldn’t pay out the money as a dividend, instead they’d use the money to generate growth.

Domicile

Domicile can be controversial when you say it out loud. The UK’s non dom regime is case in point. But we aren’t talking about that here.

Instead I refer you to the domicile attributed to your investment fund.

Make sure yours is suitably domiciled for your current situation. Withholding tax (as discussed above) can be seriously detrimental to your investment returns otherwise.

As an example, take two expat neighbours living in the same block on the same street in the same city in the same country. Both invest in global index funds to grow their wealth as is the thing these days.

There’s a difference though. One’s an American and the other’s a Brit. And this is important for your financial health.

It is nearly always the case that the American should choose a US domiciled fund, whereas the Brit shouldn’t. (Brits are usually better with Irish domiciled funds).

Moving home

Unless you live under a rock, the UK non dom regime shouldn’t have passed you by.

Both of the main parties have made it a central piece of their election campaigns.

In case, you don’t know, non doms can live in the UK without paying tax on their overseas income.

Whilst the idea that foreigners are here without paying tax grabs the headlines, the reality is something a little different.

Usually, it simply means they don’t have to pay tax on income generated outside the UK.

In other words, they still pay tax if they earn money in the UK. And importantly, and what has totally been whitewashed from the recent media coverage is this. Brits often get the very same treatment when they move overseas. Even those in the low income camp.

That’s just to say many countries have something similar that you could take advantage of if you moved there. Not only that, but many popular expat destinations are can be considered low tax regimes anyway.

Pass the parcel

If you earn more than your partner and have assets in your name, it often makes sense to place one or more of those assets in your partners name. Quite literally sharing the wealth.

Sure you have to trust your partner, but if you can’t they shouldn’t really be your partner now should they.

In fact, this is one of those simple steps that many people who could, don’t take and as a result end up paying for it dearly.

Most people’s circle will have similarly compensated families that appear to lead entirely different lifestyles.

More often than not this is due because one partner has everything that matters in their name.

And more often than not ego is getting in the way of wealth.

Water resistant tax planning

This one sounds like it might be beyond most people’s means. That is until you actually meet people doing it.

Sure you’ve got to be a certain kind of person to want to do it as there are practicalities that will make it difficult for many. But, that doesn’t mean it’s not an option for some.

As for what tax planning tools we are talking about here:

Yachts!

I know what you are thinking, yachts cost millions! Only the uber rich can play that game.

But that’s where you are wrong. Those in the know say something liveable and sea worthy can be snapped up for less than £60K. And considerably cheaper options are available for DIY enthusiasts.

And here’s the secret. Most countries tax people who live there. And here’s the bit that matters most. You aren’t living there if you are living on a yacht.

Men in suits

Many people’s tax situation is simple. Simple tax affairs don’t usually need accountants.

On the other hand there are more than a few out there who could do with an accountant to help them.

Either because they don’t have time to handle things themselves or because their tax situation is on the complex side.

I’d like to say accountants specialise in tax avoidance and exploiting tax law loopholes but I think that sound’s a bit controversial when you say it out loud.

So perhaps, a better way to put it is this. Accountants know the best way for you to organise your tax affairs so that you pay less than you otherwise would.

(At the very least they can prevent you from overpaying which many people do).