Britain’s super wealthy are turning to borrowing to fund their lavish lifestyles in an effort to cut tax bills and take advantage of the plunge in interest rates.
Top wealth managers have observed a surge in interest from rich individuals in tax-saving loans over the past three years as they benefit from ultra-cheap money during the pandemic.
Rather than live off money made from investments, the super rich are using loans secured to assets to fund their lifestyles amid record low bond yields. Tapping cheap loans for money, a practice known as “buy, borrow, die”, allows wealthy clients to hold onto their investments but also avert taxes on capital gains.
Tim Fuller, associate director at Saunderson House, a wealth management firm, said: “Over the past two to three years we have seen considerable interest from clients in using debt to fund expenditure rather than drawing down on investments.” Mr Fuller said none of his clients were using the practice three years ago but now several have turned to borrowing and more are exploring it.
He said: “Low interest rates coupled with the ability to avoid cashing in investments and incurring capital gains or income tax, is a strong incentive to use debt.”
Paul Bagatelas, head of international at Coutts, the private bank which serves the Queen and Royal Family, said it was a growing trend.
He said: “Despite recent concerns and discussion about inflation, on a historical basis the ability to borrow money remains extremely attractive.
“Yields have remained low for such a long time that it seems like a permanent fixture of the financial landscape and that has affected people’s usage of debt.”
The fortunes of the world’s richest individuals have soared during the pandemic after huge asset price inflation lifted the value of their investments.
A Credit Suisse report found last month that global wealth jumped by almost $29 trillion (£21 trillion) in 2020 despite historic recessions suffered by many top economies. Stocks and bonds have been boosted by central banks slashing interest rates and buying up debt worth hundreds of billions of pounds in response to Covid-19.
Mr Fuller said: “There’s a great deal of FOMO [fear of missing out] out there as well. Some clients would rather stay invested and pick up the returns on offer whilst taking on debt, rather than cash in their portfolio and risk missing out.
“There’s a lot of belief, perhaps misplaced, that investment returns will always beat interest costs.”
However, the trend could have an impact on the Exchequer’s revenue as tax campaigners criticise the wealthy for cutting their bills.
Robert Palmer, executive director at Tax Justice UK, said: “If you’re really rich, it feels as though the tax system and the financial system, have these ways in which you can get away with really lowering your tax bill.
“The value of assets and wealth for those at the top has shot up during the last couple of years. Wealthy people financially at least have had a very good pandemic, so it feels even more unfair that they’re finding new ways of reducing their tax bills.”