There is no doubt as to the skills, drive, ambition and, often, pure bloody mindedness, of the entrepreneur needed to build a successful business. People management skills, selling & marketing skills, business planning & implementation skills to name just a few are all needed to ensure you create the environment that will allow a business to flourish, expand and, eventually, to be sold to a third party or floated on the markets.

One of the Tricks of the Rich that I learned in my 30 years as a Financial Adviser is that successful wealth creation is NOT about making or earning money, it is about keeping money! While there are many things in our lives that stop us keeping the money we make and earn, the greatest liability of all is Tax. As we earn money we pay Income Tax, as we make money we pay Capital Gains Tax, as we spend money we pay VAT and excise duties and as we invest money we pay Stamp Duty. Death isn´t even tax-free anymore, as when we die our heirs pay Inheritance Tax as our hard won assets are passed to the next generation.

The rich approach taxation in a very different manner to the rest of us. Most business owners deal with taxation in arrears, only giving thought to the subject after the business year has ended and the Auditor is seeking the books so that the compliance piece can be delivered. The rich approach tax from a completely different direction, they plan it in advance, taking time to learn of all legitimate tax concessions available to them and manipulating their world to qualify for as many as possible. One would have to possess truly magical powers to change the past, but proper and prudent tax planning can deliver huge benefits in the future.

As a Financial Coach, I share the tricks and tactics the rich use to make, grow and keep money. In this article, I want to outline two of the tactics they use as they build businesses to KEEP more than most.

Remuneration Planning

The rich recognise that it is how remuneration is paid and to whom it is paid that dictates the taxes levied. When they have all their eggs in one basket (when the business in question is their sole asset creating wealth) they also realise that, as the business grows and expands, they should use the remuneration it delivers to create a separate (and protected) pool of wealth elsewhere. In this way, over the years of hard work required to grow the business, they are “hedging their bets” and are using the income to create financial security for themselves and their family, independent of the business itself. In this way, even if the business does not become valuable in its own right, those long years are rewarded.

The “tools” that you can use to lower taxation and build independent wealth include: -

Retirement Plans

The concessions available to business owners under existing Retirement Legislation are considerable and play a large part in how the rich plan personal taxation. Most business owners, who are making separate, personal investments, do so as follows: -

They earn their Income – they pay tax on that income – they invest surplus income – they pay more tax on investment profits

By using all available tax concessions, the rich take maximum advantage of this legislation and so they: -

Earn their Income – they invest the surplus – they pay tax on their residual income – they pay NO Tax on their investments

You can clearly see that taking advantage of the tax concessions available will, where the amount of money that can be invested in this manner (and the Revenue do apply limits) is concerned, simply ensures they invest more of what they earn and will keep more of what they make.

Historically, one of the reasons why so many business owners have failed to take maximum advantage of these concessions is that they believe that they need to buy a Pension Plan to enjoy them. Not only are off-the-shelf Pensions often poor value (where their charges are concerned), but their less than attractive, one-size fits all, investment opportunities are less than exciting too. The tax concessions outlined can be enjoyed without the need to purchase such a product and the investment flexibility of Private Pensions means that virtually any investment you can make personally (there are a number of investment prohibitions) can be made within these vehicles too. So, for most, you can invest in the same asset, achieve the same returns, but keep more when you, as the rich do, use retirement legislation to your best possible advantage.

Personal Tax Allowances

The rich ensure that whatever salary payments are being made from their business, payments are allocated to the promoters (and their families where possible) keeping a weather eye on personal tax allowances. One person earning €100,000 a year will pay a certain amount of tax, but if that income is split between two, then less tax may payable and more income is kept.

I cannot tell you how many times I have met business owners, whose spouses are supporting their business in many ways, but who have neglected to pay a salary to those spouses. If you are one of these, and assuming your spouse is not using his/her tax allowances elsewhere, you should be looking to pay your spouse. This may not only lower tax right now, but it will also double your opportunities to use the retirement allowances referred to above, saving even more tax down the line.

Shareholder´s Planning

Assuming that you will be successful, that you will build a valuable and saleable business over time, the amount of wealth you and the family keep will be dependent upon the taxes paid as the gain is made (Capital Gains Tax (CGT) is currently charged at 18%), and the further taxes your family will pay as and when value is transferred to them (Gift/Inheritance tax is paid at 40%).

One “trick of the rich” is to pay close attention to who owns the shares of the companies they build. If your business is the success you hope it to be, it may well deliver more wealth to the current generation than it will ever spend, thus guaranteeing that some of the wealth will be passed to the next generation. In simple terms, one can say that if you pay CGT of 18% when you make the sale, and then your heirs pay 40% as the assets are transferred, a total of 58% of the wealth you are now generating will disappear in taxes.

What “the rich” do is transfer shares now, when they have a relatively low valuation, to their heirs. By utilising the current Tax Free Thresholds (certain amounts of assets can be given to certain heirs tax free) now and by continuing to use future allowances when the Tax Free Thresholds rise, over time they can transfer shares at no tax cost, and later, when the business is sold, the heirs pay only the 18% CGT liability and avoid the 40% tax altogether.

One immediate problem you may perceive with this strategy is giving control of valuable assets to less than experienced heirs, but “the rich” know how to avoid this issue too. By using a Trust Fund to house the gifted shares and by ensuring they, the donors, are the Trustees of that fund, they retain full and total control of the assets (and the voting rights that may go with some shares) for as long as they wish.

There is no doubt whatsoever that it is how you go about planning your business that will dictate whether or not you eventually reach your wealth creation goals. Incisive Edge deals with these commercial “hows” and I am sure you have already seen the value being generated by changing some of your activities and processes. The same is true when it comes to how you approach wealth creation and maintenance and if you simply change your activities and processes you will, like “the rich” keep more.

Paul Overy is a leading financial coach and author of Tricks of the Rich