The richer they are, the less tax they end up paying. This is down to the elites hiring the very best accountants, lawyers and tax advisors out there to protect every dime of their fortune. With clever tax structures like shell companies, offshore accounts and trusts, their riches are kept well away from Uncle Sam.
The tax avoidance of the rich and famous have been made public once more.
Remember the Panama Papers? That gigantic data leak of 2016 that exposed the not-so-kosher money moves of the ultra-rich. Well, it’s got itself a makeover. Say hello to the Pandora Papers – a 2.94 terabyte data leak. Welcome to financial gossip on steroids.
The Pandora Papers revealed the juicier side of the elite’s finances, exposing their vast shadow fortune. Leaders from across the globe found themselves in this not-so-flattering spotlight. Take King Abdullah II, who splashed out more than $100m on property in major cities London, Washington, Malibu and California. I suppose one city per season sounds reasonable enough. But it doesn’t stop there. The king had used a network of offshore accounts (a.k.a tax-busting structures) to buy three properties in Malibu for almost $70m.
Looking at the Pandora Papers through a pure tax lens they are far less incriminating than its predecessor Panama, focusing on legal tax structures (shell companies and offshore trusts) that allow the super-rich to shrink their tax bill.
Offshore companies are one of the most common tax structures used by the super-rich to buy properties since this can save them millions of dollars in stamp duty land tax (SDLT) alone. If, like King Abdullah, you’re buying real estate in the hundreds of millions, the SDLT bill will be immense and reducing it is top of your agenda.
Offshore companies are created with the buyer as the shareholder (this can be one or more individuals) who owns a stake in the company. So, when this company then buys a property (or ten) there is no need to pay stamp duty land tax (SDLT). This tax is paid by the buyers of a property/land above a certain price, but it is not paid when a company owning a property is bought because the shareholding of the company is merely switching hands (a lovely technicality in the law that is often exploited) as opposed to a change in the actual ownership of the property.
Then there’s shell companies (it’s all in the name) which are ‘companies’ only in a technical sense, i.e. they are solely created for tax avoidance purposes and don’t actually operate any real business nor do they benefit the economy at large (no job provision) and thus they should be subject to far greater scrutiny.
These accounts are used for one of two reasons: either to avoid tax or to hide dirty (a.k.a. laundered) money. Remember: It’s not illegal to use these structures to avoid taxes but they’re often used for the latter – to stash away cash that was earned in a less-than-upright way.
Since the release of the Panama Papers, governments have been clamping down on these structures and the rules that govern them. They’ve passed as series of laws to increase transparency and reduce the amount of money that flies below the radar. But they’ve still a long way to go.
Take South Dakota: this state has seen their trust industry quadruple in the last 10 years alone, bringing the figure to $75.5bn! The US is known to be notorious for lagging behind the rest of the world when it comes to tax transparency.
It’s no wonder that former US President Donald Trump had gotten away with paying a measly $750 (roughly £580) in federal taxes in 2016 and 2017. Lucky chap. Something tells me that if Robinhood were to be around, he would be sourly disappointed.
Why do these papers sting so?
We’re in the midst of a pandemic with wealth inequality rising faster than our gas bills. Asset price inflation, the kind spurred on by the Fed’s quantitative easing (printing money to buy government assets, flooding the financial system) benefits the rich while hurting the poor.
Since the rich hold assets (real estate, stocks, classic cars, you name it) they’ve seen their wealth skyrocket as of late with many assets trading at all-time highs. But the poor (who own no assets) are the ones that end up paying these higher (rather inflated) prices and they’re the ones that ultimately get left behind. Inflation through this lens is a tax on the poor and a gift to the wealthy
We not only have inflation but we are seeing taxes being hiked left right and centre, from income tax to national insurance to capital gains tax (CGT). Nothing is sacred anymore.
So, what do you think happens when the ordinary, hard-working folk see and read about the opulence of wealth and these vast savings gains (more than what most would earn in a lifetime)?
I’m in no fight with capitalism here. It gives every single individual the chance to amass fortunes for themselves and to ride on others’ successes, too! We can buy shares in tomorrow’s winners and profit handsomely. With so much money flying around, there is some cream for everyone. Capitalism is a wealth-generating machine, if used correctly.
But I’m inclined to believe that if all this tax-free money were to be pumped into the actual economy (not the shadow one) then maybe our countries’ finances wouldn’t be so battered.
If the rich can do it, so can we!
These tax-saving methods used by the rich daily are not illegal. Chances are, us lot do not have the resources to be able to hire swanky accountants and lawyers. But to truly master your wealth, you need to understand how taxes (and debt) work or else you’ll be living from paycheck to paycheck, paying a great deal in taxes, certainly more than billionaire Trump pays which isn’t a nice thought.
There are some cheap ways to shrink your tax bill and protect your profits that require no fancy finance professional.
Wrappers to protect your treats
Tax wrappers in the UK such as ISAs, LISAs and Sipps allow you to amass wealth and pay zero taxes on the gains. Yup, you got it. No income tax (yay) and no CGT (double yay)! So if you’re considering investing it’s wise to house it in one of these structures.
They all have different purposes and thus slightly different rules but the common theme is No Tax! I’m afraid this kinda wrapper doesn’t exist in the US. The closest thing you can get to our ISA is a Roth IRA that provides tax-free growth and tax-free withdrawals in retirement.
Ways to shelter your buck from tax/reduce your overall bill
Venture Capital Trusts (VCTs) are publicly listed companies that invest in small, unlisted companies that are at the beginning of their growth. This is a risky prospect since more than 90% of start-ups fail, so the government has made this sort of investment enticing due to possible tax savings such as paying zero GCT on any profits, as well as receiving tax-free dividends and other such advantages. But, you need to have held these assets for a minimum of five years. Sell them earlier and you would not be eligible for these tax gains.
Similarly, Enterprise Investment Scheme (EIS) investment qualifies for business relief for IHT, so they are free of IHT after the shares have been held for a minimum of two years. VCTs, on the other hand, do not have this benefit and are taxable as they will form part of your estate. (IHT is levied on assets within your estate).
All in all, tax is an opaque industry but once get to the belly of it all, you’ll (hopefully) find yourself able to keep more of your money. Which is what we all want. No one likes giving away their wealth, least of all when you’ve worked your butt off to acquire it.
So, when you lot go out and make your millions, it’s certainly worth spending time looking for ways to (legally) reduce the amount of tax you pay each year and to hire a professional (if you have the resources). But we’re lucky that with the gift of the internet, we can do a whole lot on your own.
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.