Wealthy individuals vulnerable to tax changes by not taking advantage of allowances available to them

A serious knowledge gap exists among wealthy individuals when it comes to tax allowances available and if they are being used to their full potential, according to new research from Charles Stanley, part of Raymond James Wealth Management.

Almost half (49%) of high net worth (HNW) individuals revealed they either do not fully understand, have not heard, or outright don’t know what the Capital Gains Tax (CGT) allowance is. This rises to two thirds (65%) among those who do not receive financial advice, showing an alarming gap when it comes to understanding this tax allowance.

Upon further examination on whether HNWs are making the most of the CGT allowance, just 37% of HNWs say they make the most of it. 32% say they think they can take advantage of the allowance but don’t know if they are or not, and 12% say they don’t think the allowance applies to them. A further 12% say they do not make the most of it. 

Similar lack of understanding or usage applies when it comes to allowances related to inheritance tax (IHT). Two thirds (65%) of HNWs admit they either do not fully understand, have not heard, or outright don’t know what the Nil-rate band allowance is, and 60% say the same when it comes to the residence nil-rate band.

A further 41% of HNWs reveal they do not fully understand or know what the tax relief is when it comes to charitable donations, and 52% are not making the most of the relief available. Depending on the method of donation and tax status, such as Gift Aid declarations, via the Payroll Giving scheme, or leaving charitable gifts in a will, individuals may be eligible for some form of tax relief. While individuals could be missing out, it also means that charities themselves miss out from extra funding due to the lack of awareness from individuals.

Other tax allowances HNWs admit to not knowing or understanding include business relief (50%) and the annual gifting allowance (49%), while 54% and 59% respectively are not making use of the allowances.. 

With rumours also circulating over what Chancellor Rachel Reeves will announce in the upcoming Budget, many will be looking at how they can optimise their current financial positions, seek professional advice, or ensure they are maximising tax-efficient allowances available to them. Yet with so many in the dark over what the allowances are, it could mean that individuals will be susceptible to tax changes or won’t take preventative action, depending on what is announced.

Couples are also missing out, with only 43% of HNWs who are married or in a civil partnership  making the most of the marriage allowance, and potentially losing out on hundreds of pounds.

Harry Bell, Director of Financial Planning at Charles Stanley, comments: 

“The Chancellor’s Budget draws closer and is poised to be one of the most consequential fiscal events this year. With a fiscal gap estimated at as much as £35bn, rumours are circulating over what tax rises or reforms could be made to help deliver a strong economy. This inevitably brings a prospect of higher taxes and a sharp squeeze on consumers, and for higher earners it could have a more considerable impact on their finances. 

“What this requires is for individuals to ensure they are prepared, understand, and make the most of what tax allowances and reliefs are available to them. Employing these into wealth strategies can go some way to help preserve and protect wealth for the long term. Crucially, the value of advice and financial planning cannot be understated here. Not only can advisers support clients with achieving their financial goals, but can help make the most of tax-efficient vehicles and allowances to create and maximise a more secure financial future.”