You are your business…
How to manage your finances when your capital generates over £300k pa
As an ex-footballer or an entrepreneur who has perhaps recently sold a business, it is not uncommon to have amassed a level of wealth where your capital is now generating substantial sums of money. For example, if you have £5 million or more of investible assets, this could be generating as much £300k of income or growth for you annually.
The reality is that for most people in this situation, they don’t really think about how to manage things day to day. The investments are set up, the income is coming in, there’s no need to do anything more. They tend to be passive observers rather than actively involved. From my perspective and as someone who manages a number of this type of client, it’s helpful to think of your own financial position as it’s own business or mini eco-system if you will. We want our clients to get the best out of their capital.
We often see clients paying family out of their business. A non-working spouse or parent might well be on the payroll. It’s a useful way to build more capital as you’re only paying corporation tax and not drawing dividends, if you don’t need to. If, for example, you are still employed and an additional rate tax payer, this is a helpful tool.
You might also have loaned this business its capital to get started, which allows you to repay yourself the loans in smaller increments to play around with your cash flow.
We believe there are three things to get right in terms of your business set up.
Build a team you trust around you
Yes, this is self-serving, but allow me if I may...
We believe clients in this situation should have someone acting as an adviser for your investment strategy and for your accountant to act as your ‘Finance Director’. This is to keep a close eye on the income, expenditure and tax planning. You want to have the right controls in place for your structure and strategy. Together with your team you can then work to help the business – your capital – grow and develop, so that it continues to provide for you now and in the future. This set up will also mean that regular reviews are undertaken to look out for new opportunities and to make sure nothing is underperforming.
2. Have the right protection in place
This is about making sure that if something were to happen to you – if you have an accident and became incapacitated or pass away – that the capital would be protected and continue to be managed in the way that you want it to be. Your team will also help with this situation and the fall out which can occur if someone were to pass away. This is yet another reason to get the right people in to support your loved ones.
3. Understand the tax position of this income
Getting someone to do a thorough review of how the investments and the income is set up to make sure that everything is running as efficiently as possible from a tax perspective is a no brainer. There will invariably be more tax-efficient ways to set up the investments and payments.
It’s all about proactively taking care of the revenue your money generates by introducing a different way of framing how you see yourself and how you manage your investments. This kind of income is often called a passive income, but in reality it should be anything but.