Taxation: the invisible pillar of wealth management
Far from being a secondary consideration in wealth management, taxation is one of the factors that most strongly determines the real return on assets. A portfolio may be well diversified and composed of solid investments, but without tax planning net gains are reduced and growth opportunities are limited. For sizeable estates, this lack of planning can have an impact of up to 3% per year in taxes that could otherwise have been avoided.
Taxation affects every stage of wealth: when income is generated, when assets are simply held, and when wealth must be transferred (either during one’s lifetime or after death). This is why it should be integrated into every decision, to protect and grow capital consistently and coherently.
Dividends and interest: withholding taxes, a small but important detail
Foreign fixed income often has no withholding tax at source, but dividends usually do. In the United States, for example, the standard withholding tax is 30%, which can be reduced to 15% if there is a double taxation agreement in place — as is the case with Spain — and the investor submits form W-8BEN to the financial institution, indicating eligibility for the reduced dividend rate. This seemingly minor step can generate very significant savings. On an annual dividend of €300,000, applying the double taxation agreement can mean €45,000 in savings each year, and €450,000 over ten years, further reinforcing the effect of compounding over time.
Capital gains: choosing the right timing and tax lot
Capital gains are taxed when the asset is sold, which gives the investor room to choose the most favourable moment. In addition, the rules in some countries (such as the United States or Australia) allow investors to choose freely between different methods for calculating acquisition cost. For a €1,000,000 share sale where the holdings were acquired at different times, switching from the average cost method to another approach such as FIFO (selling the earliest-acquired assets) or LIFO (selling the most recently acquired assets) could substantially reduce the gain or increase the loss.
Investment vehicles: deferral and regulation
Having control over a low-tax investment vehicle that generates passive income (such as financial income) may trigger international tax transparency rules. These rules can require the investor to declare income that has not yet been realised but has been accrued within the vehicle, such as in an investment company or fund. In contrast, regulated vehicles such as UCITS funds, or any other fund in which the investor does not have control, allow gains to be deferred until the moment of sale. Unit-linked policies — a financial product with a life-insurance component — also offer flexibility and tax deferral until the policy is redeemed, whether fully or partially. Choosing the right vehicle for managing financial assets is therefore just as important as selecting the underlying asset classes themselves.
Wealth taxes: taxed simply for owning assets
Some countries levy taxes on the mere ownership of wealth, with rates that can reach as high as 3% per year. Optimising this burden requires analysing both the tax rules of the individual’s jurisdiction of residence and those applicable to the assets themselves, as well as considering options such as bringing forward transfers or reorganising ownership structures.
Inheritance and gifts: the final stage of wealth planning
The transfer of wealth can be heavily taxed, often at rates exceeding 40%. It is therefore essential to combine tax efficiency with another element that cannot be overlooked: the wishes of the person transferring the assets regarding how they want their estate to be distributed. Estate planning may include lifetime gifting, dividing ownership rights or using structures such as trusts. Assessing the tax residence of the person transferring the assets, the heirs and the location of the assets is crucial to ensure a transfer that is both tax efficient and orderly, while also aligned with the family’s intentions.
Conclusion
Taxation is a central pillar of wealth management: it enhances net returns, protects capital and ensures that wealth is transferred intelligently and in line with the owner’s wishes. When tax considerations are addressed in a planned and integrated way, wealth stops eroding and can realise its full long-term potential.
