could this American strategy of the super-rich save you tax?

For years, America’s super-rich have been honing the “buy, borrow, die” strategy as a means of keeping wealth in the family and side-stepping tax.

Essentially a form of leveraging, it allows wealthy individuals to buy appreciating assets, borrow against them to fund their lifestyle, and then, when they die, the assets can be passed on to the next generation tax-free.

Here, Telegraph Money explains how the strategy works and how it could be adopted for families of more modest means here in the UK.

“The ‘buy, borrow, die’ strategy, popularised in the US, is a wealth preservation technique used by ultra-high-net-worth individuals involving three key steps,” explained Shaun Moore, a tax and financial planning expert at Quilter.

“These include buying appreciating assets, borrowing against them to access liquidity without triggering capital gains tax by selling in part or in full, and passing them on to beneficiaries upon death.

“In the US, this process often benefits from a tax reset known as the ‘step-up in basis’, meaning heirs inherit assets at their current market value, wiping out the original capital gains liability.”

Although the concept has been used for many years, Prof Edward McCaffery is credited with coining it “buy, borrow, die” in the 1990s as a means of explaining to his students how rich families stay rich, generation after generation.

The “Buy, borrow, die” tactic works in these three steps:

1. Buy: The process begins with the purchase of assets that appreciate over time, such as shares, property or even businesses. David Little, financial planning partner at wealth management firm Evelyn Partners, said: “In the US [as in the UK], capital gains tax is only paid on disposal. As long as the wealthy don’t sell, their paper gains go untaxed, and the compounding effect boosts the valuations.”

2. Borrow: Once you’ve taken ownership of an appreciating asset, you’re then in a position to borrow against it. In the US, this can be in the form of a loan, which the super-rich use to fund their lifestyle but in a tax-efficient way. Mr Little added: “Loans aren’t taxable income, and the ultra-rich get the cheapest credit terms imaginable. Ideally, the interest rate will be less than the growth rate of the assets.”

3. Die: After the individual has died, “the step-up basis” rule resets the tax base to current market value (referred to as “rebasing” in the UK). The heirs then inherit assets with no capital gains liability. “The gain is simply wiped on death,” said Mr Little.

The strategy is so effective because it enables wealthy people in America to live off borrowed money tax-free without eating into their assets, which can then be passed on to their beneficiaries tax-free when they die.

The following example from Evelyn Partners shows how “buy, borrow, die” works in the US.

Imagine an American woman called Alice bought $500,000 of shares in 2000. By 2025, they’re worth $10m.

If she sold those shares, she’d pay around $2.25m in federal capital gains tax. Instead, she borrows $5m against this wealth to spend.

When she dies, her heirs then inherit the shares at $10m. They could sell them the next day with no capital gains tax bill, and the estate tax would not apply as it’s within the generous allowance.

As a result, Alice’s lucky heirs inherit the full $10m with no taxable gains.

The biggest stumbling block for anyone wanting to employ the strategy on this side of the Atlantic is, of course, inheritance tax. In the UK, it’s a lot harder to pass family wealth down the generations tax-free.

Mr Moore said: “Borrowing against assets is generally viewed as capital, so it is not taxable income. However, while the UK does offer a capital gains tax uplift on death similar to the “step up in basis”, inheritance tax applies at 40pc on estates above a £325,000 threshold (plus a possible £175,000 addition where residential property passes to a lineal descendant).

“Debts on assets which are payable by an estate are deductible, helping to reduce the valuation for inheritance tax purposes.”

In the US, there is a form of inheritance tax called estate tax, but as Mr Little explained, it’s not as punitive as the British equivalent. “With a current exemption of $13.99m per person (rising to $15m in 2026 under new legislation), it only affects the very wealthiest households. In practice, many billionaires work around it with trusts and philanthropy.”

Here’s how “buy, borrow, die” would work in the UK, with another example from Evelyn Partners.

If Alice were a UK resident, the mechanics of buying and borrowing would look similar. Capital gains tax (now 24pc for higher-rate taxpayers) is only paid on sale, and loans are not taxable income. So far, so good. At death, assets in Britain are also “rebased” to market value, wiping out historic gains.

The catch is that Alice’s heirs will need to pay inheritance tax.

In the UK, the nil-rate band for inheritance tax is £325,000 per person, with an extra £175,000 if the family home passes to direct descendants (which doesn’t apply in this example as total wealth is above £2m).

Assuming Alice has already used all her available allowances, this leaves the entire share value exposed to a 40pc tax charge – a liability that would be close to £4m.

In this case, those in the UK would need to work harder to plan their estate wealth management to shield their cash from inheritance tax and may consider steps such as setting up trusts and making gifts.

“Unlike the US, there’s no multi-million-pound exemption for the middle classes,” said Mr Little. “Unless wealth is tied up in qualifying business assets or sheltered by trusts, HMRC will take a vast slice before heirs see a penny.”

He added: “In the US, the buy, borrow, die method lets fortunes cascade across generations with minimal tax friction. In the UK, the strategy collapses at the final hurdle because inheritance tax is unavoidable and starts biting at comparatively low thresholds.

“For UK families, clever planning can soften the blow, but the dream of living tax-free and passing assets untouched to heirs remains firmly on the other side of the Atlantic.”

The table below shows how the tactic compares in America versus the UK.

In the UK, inheritance tax will take the shine off any “buy, borrow, die” strategies. But some investors might still try to use leveraging within their financial planning, as Mr Moore explained: “Wealthy individuals sometimes borrow against assets to fund their lifestyles while keeping investments intact,” he said.

“This can defer capital gains and preserve long-term growth, to then be passed to their loved ones. But it’s far less common in the UK, where securities-backed lending is niche and borrowing against shares is complex and often expensive.”

A private bank could be the answer here, but usually only if you want to leverage your assets to buy property. Unlike high street lenders, private banks can be much more flexible when it comes to what they are willing to lend against. While you’ll usually need to have a certain amount of wealth to start with – around £1m is not unusual – you may be offered a mortgage even if you don’t have any income, as long as you have enough assets to show how you’ll pay it back.

Depending on your situation, the property may be for personal use or used to create a new income stream – allowing you to build your wealth further.

Mr Little tentatively suggests an alternative option better suited to the UK could be “sell, gift, die”.

“Taking into account the highest rate of capital gains tax is currently 24pc in the UK, compared to inheritance tax at 40pc, if succession planning is the goal, then it would make sense to sell down assets and then gift prior to death.”

The caveat is that you need to survive at least seven years for gifts to be passed on free of inheritance tax. “As it is virtually impossible to predict our own date of death, this makes this strategy very risky in older years,” he said.

“The worst-case scenario would be paying capital gains tax to sell down an asset, give the cash to an heir and then pass away shortly thereafter. This would mean paying 24pc capital gains tax on sale and then a further 40pc inheritance tax on death.”

For these reasons, it always makes sense to seek professional advice before you put in place any plans to reduce a potential tax bill.

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