One of the most persistent questions people ask is: “Why do the ultra-wealthy often seem to pay so little tax?” Headlines regularly show billionaires with massive net worth paying a surprisingly low amount of tax relative to their wealth.
The answer isn’t that they’ve found a secret loophole unavailable to everyone else. It largely comes down to one powerful strategy: they use debt instead of selling assets.
Borrowing against assets rather than selling them allows wealthy individuals to maintain wealth compounding, avoid triggering taxable gains, and often access money more cheaply than by liquidating investments.
In this article, we’ll explain:
- Why selling investments can be so tax-inefficient.
- How borrowing against assets works.
- The specific tools the rich use to access liquidity via debt.
- How this keeps their taxable income artificially low.
- Whether everyday investors can apply similar principles.
The Problem With Selling Investments
For many people, when they need cash, they sell an asset. But selling triggers tax — particularly if the asset has grown in value.
For example, let’s say you invested £1 million into a portfolio that has grown to £2 million. Selling £500,000 of it might trigger a capital gain of £250,000 (depending on your cost basis), resulting in a significant tax bill. That reduces your future compounding potential.
By contrast, borrowing against that £2 million portfolio involves no sale — and therefore no capital gains tax.
The Principle: Borrow Don’t Sell
Wealthy investors treat their investment portfolios, property, and even business equity as collateral. They arrange a line of credit against these assets and borrow from it when they need cash.
They get liquidity, maintain ownership of the appreciating asset, and continue to earn returns on the full investment.
Meanwhile, what appears on paper as “income” is often minimal because they don’t sell or draw from taxable sources. Hence their reported taxable income is low relative to their net worth.
How Rich Investors Use Debt Instead of Income
Here are the most common methods used by wealthy individuals and families:
- Securities-Based Lending (Margin Loans orLombard Loans)
- Investors pledge their investment portfolio (e.g. equities, bonds, ETFs, funds) as collateral to a private bank or wealth manager.
- They are given a credit line, often borrowing 50–70% of the portfolio value.
- Interest rates are typically low because the loan is asset-backed and low-risk for the bank.
- The investor uses the loan proceeds to fund lifestyle, invest in other assets, or reinvest in new ventures — without selling.
- Property-Backed Borrowing
High-net-worth individuals may hold vast property portfolios. Instead of selling properties, they remortgage or refinance to extract equity when values have increased. Again, no sale = no tax.
- Borrowing Against Private Company Shares
Founders of successful businesses often have billions tied up in illiquid company stock. Rather than sell shares (triggering capital gains and potentially signalling loss of confidence in their business), they borrow against the shares.
- Loans From Family Trust Structures
Wealthy families often establish trusts that hold assets. The trust can borrow and distribute money as loans rather than taxable income or capital. In many jurisdictions, this allows wealth transfer while minimising tax leakage.
- Corporate Debt Strategies
Rather than paying themselves high taxable salaries or dividends, business owners may retain profits within the company and borrow personally from the company under specific loan arrangements, often structured with repayment strategies in mind.
Why Borrowing Often Makes Financial Sense
It’s easy to assume debt is always bad, but in the world of high finance, it can be an efficient cashflow tool.
Here’s why borrowing is attractive to the rich:
- Interest rates are often lower than capital gains tax rates.
- Interest may be tax-deductible depending on jurisdiction and loan structure.
- Compounding continues on the full asset value.
- They control when (if ever) tax is triggered.
- They can delay tax indefinitely, sometimes until death (after which some jurisdictions provide tax resets for heirs).
In many cases, wealthy individuals simply hold their assets until death, at which point the tax basis is reset for beneficiaries. The loans may then be repaid via the estate or refinanced by heirs.
Real-World Example (Simplified)
If the investor expects the portfolio to grow at 6–8% per year and the interest rate is 3–5%, the spread can work in their favour while allowing long-term wealth compounding.
Why It Keeps Their Tax Bills Low
Tax systems often focus on income, not wealth. Since borrowing is not considered income, it doesn’t count as taxable earnings.
So, someone worth £100 million who lives off loans secured against their investments might show a reported income of £30,000, despite living a multimillion-pound lifestyle.
Tax is only due when they realise gains — but well-advised investors delay this as long as possible. Meanwhile, workers who earn salary have immediate tax deducted at source.
Can Regular Investors Use the Same Strategy?
While these strategies are often associated with the ultra-wealthy, certain elements are increasingly available to high-net-worth and even affluent retail investors.
For example:
- Using low-cost portfolio credit facilities (offered by some private banks and wealth managers).
- Borrowing against property rather than selling investments during downturns.
- Using director’s loans carefully in a limited company structure.
- Employing interest-only borrowing strategically in retirement.
However, caution is essential. Borrowing against volatile assets (like equities or crypto) carries the risk of margin calls if the value falls dramatically. Property borrowing also becomes riskier if interest rates rise.
When It Goes Wrong
Not all borrowing-based strategies are risk-free:
- Overleveraging can result in forced sales at depressed prices.
- Rising interest rates can make repayment unaffordable.
- Asset price declines can lead to margin calls.
- Lenders may change loan conditions in extreme market conditions.
The strategy only works when borrowing is used strategically, not recklessly.
It’s Not About Avoiding Tax — It’s About Controlling When It’s Paid
Rich individuals don’t necessarily “evade” tax. Rather, they defer it, minimise it, and control when it’s triggered.
By borrowing instead of selling, they keep their assets compounding, maintain flexibility, and report minimal taxable income — legally.
For wealthy and high-net-worth individuals, understanding how debt can be a tool rather than a burden is essential. Used responsibly and with professional advice, similar principles can be applied to protect capital, enhance cashflow, and manage tax efficiently.
Risk warning:
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.
