You can make more money and “save huge sums of money” in taxes by investing your money in a diverse portfolio rather than real estate, said investment expert Jordan Gillies. Mr. Gillies of Saltus, a financial planning and investment management company, shared his expertise on how exactly Brits can make these “huge” savings.
“But please take into account the taxes you may pay.”
When comparing two retired investors, he named James, a pure real estate investor who only owns rental properties, and Olivia, who keeps her wealth in various tax vehicles available to everyone.
Although both James and Olivia have net worth and income of £ 2,500,000, they are taxed differently.
Mr. Gillies continued, “James will make a net rental income of £ 130,000.
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“Unfortunately all of this is taxed as income and will exceed £ 125,140.
“This means that James loses his entire tax-free allowance, so that every cent of his income is taxable.”
Due to normal taxation, the first £ 37,700 will be taxed at 20 percent and the remaining £ 92,300 of his annual income will be taxed at 40 percent.
“That means James would pay a total of £ 44,460 in taxes,” he added.
Comparing these numbers with Olivia, Mr. Gillies explained the various tax machines a person can invest in to save taxes.
Good places to invest your money and diversify your portfolio are in annuities, ISAs, general investment accounts, or bonds.
Olivia had invested a million in her retirement and ISA accounts, £ 300,000 in her general investment account and £ 150,000 in a bond.
Mr Gillies continued, “25 percent of Olivia’s pension is entirely tax-free … so she can take £ 10,000 tax-free from that pension each year to last throughout her retirement.
“She then takes another £ 50,270 from her pension, and in fact, it’s only that 50,000 that she’s going to take as income so that Olivia has her full tax-free personal allowance, so £ 12,570 of that becomes completely tax-free.
“Of that £ 50.00 only the £ 37,700 is actually taxed at 20 percent. Then she takes an additional 50,000 from her ISA, which is totally tax free, and £ 12,300 a year from her general investment account using her annual capital gains tax allowance, again no tax.
“Finally Olivia can take five percent of tax deferred withdrawals on her bond every year, so we can get down to the last £ 7,430 from here to make up the full £ 130,000.”
It’s important to emphasize that while this may sound complicated, apart from borrowing, this is pretty straightforward tax planning.
If we follow this example, we see Olivia making £ 92,300 tax free every year, which means she saves a lot more taxes than sole real estate investor James.
Ultimately, if you want to save on taxes, it might be best to speak to a financial planner.