Holistic tax planning is more than just a buzzword; it is a crucial strategy for anyone serious about managing their finances effectively. We believe that, to truly optimise your tax strategy, you must consider the entire tax landscape rather than focusing on isolated elements. In this week's episode of the "I Hate Numbers" podcast, we explore why taking a holistic approach to tax planning is essential and how it can benefit your overall financial health.

The Importance of a Holistic Approach

When it comes to tax planning, simply addressing one aspect of your taxes can lead to unintended consequences. For instance, when you decide to incorporate your sole trader business, you might focus solely on the benefits of paying corporation tax at a lower rate. However, if you do not consider the impact on your personal income, national insurance contributions, and potential future liabilities, you might end up with a less efficient strategy. Thus, it is evident that understanding the interplay between various taxes is critical.

Key Examples in Holistic Tax Planning

Incorporating a business is just one example where holistic tax planning comes into play. Additionally, we discuss the interaction between capital gains tax and inheritance tax. We explain how decisions about property sales and gifts can significantly affect your tax liabilities. Consequently, without a holistic view, you might make decisions that save you money now but cost you dearly later.

Seeking Professional Advice

Therefore, we emphasise the importance of seeking professional advice. Tax laws are complex and ever-changing, so having a qualified advisor who understands holistic tax planning is invaluable. They can help you navigate these complexities and ensure your tax strategy aligns with your long-term goals.

Conclusion

Overall, holistic tax planning should be a cornerstone of your financial strategy. By considering the broader tax landscape, you avoid the pitfalls of isolated decisions. We encourage you to tune in to the "I Hate Numbers" podcast for more insights on how to apply holistic tax planning in your life. Let's make sure your tax strategy is as comprehensive and effective as possible.

Holistic, what a wonderful term that is. Most of us might encounter holistic and being holistic in the context of medicine. Did you know, though folks, that you can actually come across that idea, that concept, and it fits very neatly in the world of tax planning? Now, in this week's I Hate Numbers podcast,

I'm going to explain the idea of holistic, how it applies very neatly in the context of tax planning, why it's essential that you take a holistic approach to tax planning. I'll share a couple of examples with you as well from the world of tax and then summarise that with the importance of seeking professional advice in the context of when you plan your tax strategy. Let's crack on with the podcast.

Now in the context of medicine, holistic medicine is where you look at the whole person for answers, not just the manifestation of physical symptoms. So if you've got something that manifests itself on the outside, you don't treat just their physical symptoms, there may be something else that's going on.

There may be something that's under the surface that's not necessarily reflected by your physical symptoms, and therefore we treat the mind, we treat what goes on between the ears, as well as the actual body itself. Holistic is about looking at the whole picture, and in the context of medicine, it's looking at the whole person.

In the context of anything, it's not looking at things in isolation. I've seen too many examples over the years where other advisors have given advice out with good intention, but what they've done, they've looked at an isolated transaction without considering the impact in the wider context of tax. Now, it's an approach that's often overlooked.

But whether you're a business owner, an entrepreneur, somebody who's managing their own individual finances, understanding that tax planning isn't just about taxes in isolation and focussing on that itself, but you've got to look at the big, broad picture. Lots of taxes will interact and interplay with each other.

And if you don't take on that approach, you could find yourself making a decision that's going to be very complicated and costly to unravel, if you can unravel it at all, and it may have consequences in other parts of your finances. So what exactly do we mean by the idea of holistic tax planning? And I promise you, I'm not going completely new age on you.

When we talk about holistic tax planning, I'm referring to the practice of looking at the entire tax landscape, not just the individual taxes in isolation. If we take the United Kingdom as a reference point, our tax system is complex. Anybody who's had any dealings with that will know their heads can explode as you dive deeper into the complexities and intricacies of taxes that are there.

There's a whole wide range of taxes that impact individuals, impact corporates. Just to give you a sample of some of the main headline taxes you're likely to encounter, you've got income tax, you've got corporation tax, you've got capital gains tax, you've got VAT, you've got national insurance contributions, you've got inheritance tax, to name but half a dozen.

Now the key to effective tax planning, to manage your affairs effectively, efficiently, without having yourself get into trouble with the regulators, with HMRC, is to understand the interaction and interrelationship of all these taxes, how one action in one area may have an impact elsewhere. Think of it like a financial butterfly effect.

Now, let me share a couple of examples that hopefully will illustrate what I'm talking about. I'm going to look at a situation where a sole trader, and that's a business operating as an individual, decides to incorporate any form of company to carry out their business activities.

Now if you are that sole trader, you may have reached that magic sweet spot financially, where it's actually worthwhile from a tax perspective to become a limited company. I should point out that it's not always advisable to form a company to carry out your trading activities. Tax and risk are certainly two main variables, but again, it's not always advisable to form a company.

But let's say, for whatever reason, our sole trader business has decided to become a company. Now I share practical experience folks, not only from advising other sole traders and other companies, but also myself in my business journey over the last 30 years. I started my life as a sole trader and got to that point where it was advisable for me to become a company.

Now you've decided that you're going to form a limited company. You've decided to incorporate your sole trader business into that company. Now initially, it seems fantastic, a straightforward decision. You think okay, I'll take that advice that I Hate Numbers offers, I'm going to remunerate myself with a salary, take some as dividends, and I'm going to top the rest up with what's called benefits in kind.

Now that is a tax-efficient strategy, but there are going to be other things to consider as well. Now for a limited company that used to be a sole trader, when I look at tax planning, I just don't look at the company in isolation. I take on board the individual, look at those two combined, look at what their objectives are, look at what they're hoping to achieve in the short term, in the long term, but when we look at incorporating a couple of things will immediately happen. Firstly, any profits generated by that company will be subject to corporation tax, the rates will depend on the level of profitability and if you've got any other companies that you're looking after. Now, corporation tax will be as low as 19% and potentially as high as 25%. Now that seems very attractive,

that seems wonderful, especially when you compare that to potential income tax rates at 20, 40, and 45 percent and that's based on the year 24-25. Now that's all very well, your company's generating surplus, generating profits, you're paying corporation tax at what seems a lower rate, but the next thing you've got to consider is taking that money out the company for your own personal betterment to reward yourself, to make sure you've got funds in a personal capacity to cover your household bills, treat yourself and your family and your friends, put that money towards something on a more personal nature, whether it's buying a house, paying rent, or whatever.

You need that personal income to come out at some point. Now we know, as a headline, dividends attract a certain rate. We know income tax attracts a different rate. And again, this podcast isn't about the specificity of the strategy. It's about saying we've got to look at the whole picture. The level of income you draw out may have an impact in if you're going for a mortgage, perhaps to borrow money,

how much you've got as personal income will influence the amount you can borrow. When we take out salary, we know that we've got to have it set at such a level that we get national insurance credits. Otherwise, our state pension, when we come to draw down on that, which will be a long way away for some, and that will have an impact if you don't pay national insurance contributions and you're purely taking out dividends, your national insurance record won't be updated,

and that will impact you when you get closer to retirement stage. Also, not paying any national insurance affects any other national insurance-related benefits as well. So looking at that holistically, we might decide an alternative strategy, just straightforward dividends. Now that's just one example, there are other factors as well. When we wish to buy something we might decide that it's best to take it out of the company. Get the company to pay for that, but then it becomes a company asset. It's no longer our own individual asset.

And again, there may be an implication on capital gains tax. There may be an implication if we build up too much by way of bank balances in our company that's going to affect inheritance tax as well. I want to share a second example with you, and that's the interaction between something called capital gains tax and inheritance tax.

Now you might be thinking, Mahmood, whatever we do from the moment we're born to the moment we leave this world, somewhere in between we're going to be paying taxes of some description. And you're probably going to be correct on that. Now let's get back to this capital gains tax and inheritance tax. Now inheritance tax, by the way folks, is a tax that you don't pay when you die.

Obviously, that's quite an extreme tax planning strategy. Inheritance tax, however, is based on the value of your estate and also on gifts that you make in the last seven years of your life. It's what's called a transfer of value. Now I'm redacting something quite complex into a very small soundbite. Now imagine this situation, you own a rental property, you're considering selling it.

If you sell that as an individual, you'll pay capital gains tax. The annual exemptions are quite mean these days, but you'll pay capital gains tax on any investment properties, on any capital gain that you make. It could be quite a whack depending on how long you've owned the property, the depreciation of that property value. Now if you're planning your estate, and again, as a heads up, folks, it sounds quite morbid, perhaps, but the earlier you start thinking about inheritance tax, then you've got a greater likelihood of avoiding that completely. Now, if you are looking at your estate, toting it up, you're thinking about inheritance tax, as we all get older, more mature, you know, inheritance tax becomes more of a reality. Now, you could look at gifting that property to your children instead of selling it, you could potentially avoid capital gains tax, but it could trigger an inheritance tax liability if you pass away within seven years of making that gift.

Now, if you hang on to that property, and it forms part of your estate when you pass away, when you die, your beneficiaries may have to pay inheritance tax on the value, even though there's no CGT at the date of death. Now, the right approach, and please do not take this podcast as a definitive answer to a question, depends on your long-term goals, your health, your overall financial situation, money you need to sustain yourself, and a whole host of other factors.

It's really critical in any arena of tax planning, that you make sure you've got competent and professional advice. These two bare-bone examples highlight why it's so crucial to get that advice when planning your taxes. A competent, a qualified tax advisor, he holds his hand up to that one, can help you understand the bigger picture, ensuring that your decisions in one area don't have unintended consequences in another.

There is an element of fact-finding, there is an element of trawling the information to understand the scenarios before you give advice. Tax laws are one of those things that always change. Rates change, allowances change, claims change. What might be a good strategy today is going to be less effective tomorrow. Reviewing your strategy at least once a year is going to be essential to stay aligned with your goals and the latest legislation.

So what can we conclude? Well, what we can conclude, folks, is that tax planning in the UK should be a holistic process. When you look at making a decision, you need to look at the big picture. The whole thing's combined, you can't just look at taxes in isolation. It's not just about reducing your tax bill one front. There may be a law of unintended consequences, and you could be impacted negatively in a different arena. Folks, I hope you got some value out this podcast.

I'd love it if you could share that with those who feel would benefit. What's your own thoughts? Do you have a holistic approach to your tax planning? Do you have a holistic approach to other parts of your life? I'd love to hear that. If you'd like to hear more, if you'd like us to help you with a holistic approach to your tax affairs, then check out the show notes.

There's a link here. Book a call and let's talk. If you've really got an advisor in place, go to them, talk to them, and ask them to help you come up with an effective, holistic tax plan. Until next time, folks, happy holisticing. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value.

If you did, then we'd love it if you shared the episode. We look forward to you joining us next week for another I Hate Numbers episode.