The super rich are going to borrow to lower tax bills

Money

Britain’s super-wealthy are turning to loans to fund their lavish lifestyles in an effort to lower tax bills and take advantage of the dive into the interest.

Top asset managers have seen a surge in wealthy individuals’ interest in tax-saving loans over the past three years as they take advantage of ultra-cheap money during the pandemic.

Instead of living off the money they’ve made from investments, the super-rich use loans tied to assets to fund their lifestyles, while bond yields are at historic lows. By tapping cheap loans for money, a practice known as “buy, borrow, die”, high net worth clients can keep their investments, but also turn them off taxes on capital gains.

Tim Fuller, associate director at Saunderson House, an asset manager, said, “Over the past two to three years, we’ve seen significant interest from clients in using debt to fund expenses rather than take up investments.” Mr Fuller said none of his clients used the practice three years ago, but now several have moved into lending and more are investigating it.

He said, “Low interest rates combined with the ability to avoid cashing out investments and generating capital gains or income taxes is a strong incentive to use debt.”

Paul Bagatelas, head of international at Coutts, the private bank serving the Queen and the Royal Family, said it is a growing trend.

He said: “Despite recent concerns and discussions about inflation, the ability to borrow money on a historical basis remains extremely attractive.

“Yields have been low for so long that it seems to be a regular part of the financial landscape and that has implications for people’s use of debt.”

The fortunes of the world’s wealthiest individuals have skyrocketed during the pandemic after massive asset price inflation boosted the value of their investments.

A report from Credit Suisse last month found that: global wealth increased by nearly $29 trillion (£21 trillion) in 2020 despite historic recessions that have hit many top economies. Stocks and bonds have been boosted by central banks cutting interest rates and buying up debt worth hundreds of billions of pounds in response to Covid-19.

Mr. Fuller said, “There’s a lot of FOMO [fear of missing out] there too. Some clients prefer to stay invested and pick up the returns offered while taking on debt, rather than have cash in their portfolio and risk missing out.

“There is a lot of belief, perhaps misplaced, that investment returns will always beat interest costs.”

However, the trend could have an impact on treasury revenues as tax campaigns criticize the rich for lowering their bills.

Robert Palmer, Executive Director of Tax Justice UK, said: “When you’re really rich, it feels like the tax system and the financial system have these ways you can get away with really lowering your tax bill.

“The value of assets and wealth for those at the top has skyrocketed in recent years. At least rich people have had a very good pandemic financially, so it feels even more unfair that they are finding new ways to lower their tax bills.”