Practical Ways to Achieve Affluence by Minimizing Your Personal Tax

| 31 Jul 2012 | 0 Comments

Income and investment taxes across the globe are reaching increasingly extortionate rates in light of rising public debts raging across Europe and America. The European sovereign debt crisis has forced many countries to raise their tax rates, whilst other countries are currently in the process of proposing tax hikes. The effect on wealthy individuals is evident: as debt problems increase, top-end earners are left to pay the price of rising tax prices. Mitigating one’s income tax bill in today’s economic climate is therefore crucial in ensuring a healthy overall saving, and there are a number of methods that can be adopted to achieve this.

personal-taxThe 2007-2012 global economic recession spurred many governments to raise their income tax rates to target high-end earners.  French president Francois Holland recently proposed an extortionate 75% tax bracket on taxpayers earning more than €1 million ($1.35 million) a year – a rate which will have a colossal impact on France’s wealthiest tax payers if implemented in 2013.

In 2011 Spain became yet another European country to raise its taxes on the wealthy, with rates hiked by 2% to 45% as a result of the economic crisis. Spain’s prime minister claimed that the tax increases were indispensible in hauling the country out of a recession, enabling those who have greater wealth to contribute more to assisting the country financially. Sweden and Belgium currently have two of the highest income tax rates in the world for high-end earners, at 56.6% and 57.3% respectively. It is evident that the implementation of these tax rates has had an enormous impact on high-net-worth individuals, as expatriates and citizens alike are left to suffer under the weight of rising tax rates.

Finding methods that will allow for the alleviation of one’s tax bill is indispensible in saving money in the long run. However understanding the best strategies to adopt is fundamental if you are to effectively save money on tax bills. Research suggests that with the right knowledge, creativity and forethought, there are a number of techniques that high-net-worth individuals can utilize to reduce their overall tax bill. Establishing an effective tax planning strategy will enable wealthy taxpayers to legally reduce their taxes, thus saving thousands, or even millions of pounds in heavy tax bills, in the long run.

Charitable donations

Charitable donations enable wealthy individuals to donate up to 50% of their wealth to a charitable trust, foundation or nonprofit organization. Charitable donations typically come in the form of monetary donations, but can also take the form of real estate, motor vehicles, securities, clothing or other assets.

Charitable donations work in the following way: taxpayers are able to donate a percentage of their adjusted gross income (AGI) to their preferred charity or non-profit organization. Governments acknowledge when a charitable donation has been made by a tax payer, and permit tax deductions accordingly. Significant tax deductions can be carried over for up to five years, by which point they can be renewed. As charitable donations are tax deductible expenses, they enable high-end earners to dramatically reduce their taxable income and lower their overall tax bill.

Charitable donations are a particularly favorable method for those who wish to keep their earnings onshore while simultaneously implementing an effective tax planning strategy. Many super-rich from countries such as the UK and USA have adopted charitable donations for tax planning purposes, not only with the intention of reducing tax bills, but to provide philanthropic assistance to those in need.

Offshore companies

It is apparent that many high-net-worth tax payers are seeking the services of offshore jurisdictions for company formation. Offshore company formation is a popular tax planning option as it not only provides extreme privacy and confidentiality, but it allows individuals to have their income paid via the company, and then earn back their salary through dividends. Some of the best jurisdictions for tax-advantaged company incorporation include The Bahamas, BVI, Belize, St. Vincent and Dominica.

tax payersUsing an offshore company for tax planning works in the following way: an individual has their salary paid into their offshore company; the company then sends a small percentage of the overall earnings back to the individual; the remainder of the capital is then placed into dividends, which are returned to the owner (who is the sole shareholder), typically on a quarterly basis.

Further to the above, the incorporation, management and administration of an offshore company is relatively straightforward, as most offshore jurisdictions are far less stringent in regards to their reporting laws. They also provide utmost confidentiality by protecting the identity of the beneficial owner, as when establishing an offshore company, anonymity is automatically granted, in compliance with the laws of the selected jurisdiction.

Offshore trusts

Whilst many high-end earners choose to keep their earnings onshore, others adopt offshore strategies for the effective reduction of their tax bills. Although it is evident that a number of wealthy individuals relocate to offshore ‘tax havens’ in an attempt to mitigate their tax responsibilities, others establish offshore trusts, which provide the opportunity to reduce taxes without the need to relocate overseas.

Offshore trusts are common law vehicles that enable the transfer of funds from one’s country of domicile to an offshore financial centre. The individual responsible for the formation of the trust (the settlor) dictates to the administrator of the trust (the trustee) how they wish their assets to be distributed, which will be detailed in a trust deed. All activity is carried out in compliance with the offshore tax rules of the selected jurisdiction.

Offshore trusts set up in low or zero tax jurisdictions offer numerous tax planning opportunities, and there are a number of innovative offshore trust strategies that can be implemented for tax mitigation. The tax consequences of using a trust are enormous, and as a result, the last few years have seen a renewed interest in offshore trust formation, with wealthy individuals seeking jurisdictions such as Panama, Liechtenstein and the Bahamas to escape high taxes imposed in many of the wealthy developed countries.

Finding the most tax-efficient strategy

With the increasing number of countries continuing to raise their taxes for high-end earners, it is apparent that a growing number of investors are seeking methods that will enable them to mitigate their tax bills and ultimately minimize their tax burdens. As a tax payer seeking legitimate means of tax reduction, it is evident that there are a number of effective tax planning schemes that can be adopted to increase one’s ultimate revenue. Nevertheless, it is important to have a comprehensive understanding of how each technique works, and to find the best strategy for your individual requirements.

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Category: Individual Taxation

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