What sets high-net-worth investors apart from everyday investors…
Are the ways in which they build and preserve their wealth.
There are tactics they use to ensure they can enjoy their wealth today…
While being able to pass it on to their future generations.
Want to know more?
Since moving to Dubai, I've met some incredibly high-performing people.
The other day, I received an invite to a birthday dinner in DIFC.
The chap is a successful business owner and it was one of those nights where I knew I was neither the smartest nor the wealthiest in the room.
Which reminds me of the quote: “If you’re the smartest person in the room, you’re in the wrong room.”
The conversations around life and money flowed seamlessly.
Each person’s story inspiring the next.
And I realised what a privilege it is to surround yourself with giants.
People who motivate you to do and be better.
Of course, wealth was a major topic of discussion.
How to grow and preserve it.
And pass it on to our children.
This group of people shared their tactics and processes.
I shared my thoughts and experiences from working with the affluent every day.
Here are five key takeaways.
1. Diversifying away from property
Most Britons have 35% of their wealth in property with high-net-worth individuals having only 17%.
While property can be a great tool for generating wealth, it’s illiquid and large transaction costs apply.
For UK domiciles, property is hard to shield from Inheritance Tax, rent can be subject to 45% income tax and capital gains tax rates are higher on property than other types of investments.
These high taxation rates are not ideal when you’re looking to grow and cascade your wealth.
High-net-worth investors understand the need to diversify away from property and into vehicles which offer long-term rewards.
And the UK government seems to agree.
They are keen to disincentivise property as a tool to build personal wealth.
That being said, if you’re purchasing property for yourself and your family to live in – the emotional benefits are invaluable.
The problems come in when property is used as a means of wealth creation.
2. Using mortgages
You’ve likely got a mortgage or had one before.
Leveraging a mortgage compounds wealth gains.
In fact, Elon Musk was reported to take out mortgages on five properties in 2019 to the value of $62 million.
The loans show how even the wealthiest people use mortgages to maintain liquidity.
Musk, with a $23.4-billion fortune, according to the Bloomberg Billionaires Index, is among ultra-wealthy property owners — including Facebook Inc.’s Mark Zuckerberg, hedge fund billionaire Ken Griffin and music superstars Beyoncé and Jay-Z — who have taken out monster mortgages.
Why tie up your capital in an illiquid investment when that capital could be kept freely available to take advantage of opportunities in the markets?
You could fund anything from your children’s top-tier university education in the UK to ‘buying the dip’ when the stock market crashes significantly.
3. Borrowing with Lombard lending
This is similar to mortgages but secured on your investment portfolio rather than a property.
It allows you to buy further assets (investment opportunities, fund capital calls, properties, yachts etc) or fund your expenses without needing to sell investments and avoid triggering tax liabilities.
According to LA times, Elon had pledged 40% of his stake in Tesla to benefit from ongoing lending to cover his personal expenditure and private projects.
The recent leak by ProPublic reveals the ultra rich pay very little in income tax.
Denise Coates, founder of Bet365, on the other hand, is an outlier. She willingly agreed to being taxed at the highest UK tax rate, paying more than half a billion pounds in tax. Yet, she was chastised for earning too much.
The stats on the ultra rich’s low income tax are not surprising as substantial wealth is rarely gained through high incomes but instead through significant growth in assets over time.
To compound this, most advanced economies tax capital gains at a lower level than income and so the system makes it easier to generate wealth via investments rather than through salaries.
What is useful to see is the affluent actually have large uncrystallised gains, suggesting they are borrowing against their high-growing assets.
4. Setting up trusts
This is a classic way to pass wealth down through the generations.
While the scope to use them can be quite limited (there may be certain restrictions with regards to how much you can put into a trust without attracting tax), there are particular trusts which can useful in specific circumstances.
It is best to take personalised advice around this area.
5. Establishing family investment companies
This is a relatively new method of passing wealth down in a controlled manner and can be very tax efficient.
The company structure does not need to be UK based but if it is, it could possibly be complemented by Lombard lending.
This would allow the interest on borrowing to be offset against the company’s tax bill.
As a growing area in financial planning, we’re seeing more individuals with £10 million+ looking into the unique benefits of family offices.
And that’s it.
Five things your affluent friends are doing that you probably aren’t.
As always, financial planning becomes increasingly complex as your wealth grows.
Find a financial planner who can take this off your hands.
Or, in the very least, simplify it for you.