Professional, timely conversations on the benefits of tax deferment and optimisation are now more important then ever, says Mark Lambert, head of Onshore Bond Distribution, HSBC Life (UK) Limited.
Advisers and clients can be forgiven for being somewhat confused about tax and its impact on investable capital given the political and economic uncertainty the UK has gone through in recent months.
Amid all the confusion one thing is absolutely clear – professional, timely conversations on the benefits of tax deferment and optimisation in relation to investment capital have never been more important for advisers and their clients.
These conversations are particularly important for helping with advisers’ responsibilities under the new Consumer Duty Rules coming into effect from 31 July which requires firms to act to deliver good outcomes for retail customers.
Focusing on tax and investable capital also delivers opportunities and challenges for advisers as they support and grow their client base.
This is the background to HSBC Life (UK’s) new report The Three I’s of Investable Capital, in association with Technical Connection, where we aim to explain the current capital investment landscape whilst outlining the opportunities for advisers in using tax effective investment wrappers such as onshore bonds.
It analyses the host of tax changes from 2022’s Autumn Statement and this year’s Budget on income tax, pensions, Capital Gains Tax, and dividend taxation and focuses on investment for capital growth, income, and intergenerational transfer.
Tax changes and investable capital
Last year’s mini-Budget outlined £45 billion a year of tax cuts by 2026/27 only for the whole programme to be scrapped and replaced with £55 billion of tax rises and spending cuts by 2027/28 in the Autumn Statement. Around £10 billion of those tax rises were then unwound in this year’s Budget.
The treatment of the Additional Tax Rate highlights the confusion – initially it was abolished and then reinstated before the tax threshold was reduced to £125,140 which had the effect of creating another 250,000 top-rate taxpayers.
It is clear that the tax burden is likely to remain high for the foreseeable future for increasing numbers of individuals, businesses, and trusts but it is important to understand the breakdown of taxation revenue for the Government.
Analysis in the Three I’s report shows that around 63% of tax receipts in 2023/24 will be delivered by Income Tax, National Insurance contributions and VAT. Tax on personally invested capital is not a significant source of income for the Treasury. Capital Gains Tax is projected to deliver 1.9% of receipts while IHT will produce just 0.8%.
Some structures such as the taxation rules for investment bonds have had little fundamental change for decades. Against all the other uncertainties in investment life, investors can take some reassurance from this.
Demand for tax advice is growing
Whilst the past year has seen some rapid changes the issue of tax and its impact on planning has been building for some time.
We conducted research for our report among a nationally representative sample of 200 advisers across the UK weighted to be representative of assets under management and the size of the firm. We backed that up with research among 1,000 clients with a minimum of £25,000 investable assets who currently have an adviser or saw one within the last three years.
Nearly seven out of 10 advisers (69%) told us they believe making investment, taxation and financial planning decisions has become more difficult in the past five years. It was a similar result among clients with 62% agreeing decision making has become more challenging.
Tax advice is becoming more relevant – our study found on average 50% of advised clients are Higher Rate taxpayers and 32% are Additional Rate taxpayers. This proportion will inevitably increase as a result of frozen thresholds, allowances, and exemptions and continuing wage inflation. Clients are more likely to want and need advice on tax effective investment.
Add to that the impact of economic and political turbulence and the industry is working against an uncertain backdrop and intensified client unease. The desire for the reassurance, clarity and pro-activity that can come from good advice is heightened and underlined by clients who, our research shows, cite ‘explaining and maximising tax efficiency’ as the second most sought after way in which advisers can improve their service.
Tax efficiency is an opportunity
Almost all (96%) clients questioned say that tax efficiency is important in relation to
investing their money. Even more (98%) advisers say that their clients believe that tax efficiency is important. Nearly half of clients (49%) say tax efficiency is ‘highly important’ compared to 56% of advisers.
Our study found that advisers believe inflation (35%) and taxation (27%) are what clients regard as the biggest threats to their invested capital and future financial well-being. Around 61% of advisers told us they routinely explain the benefit of tax deferment and tax management in relation to investments.
That still leaves nearly 40% who do not do so routinely which is possibly a result of the fact that conversations about tax deferment and optimisation are not as hardwired into the advice proposition in the consistent and robust way which client feedback suggests they should be.
Research with clients found that only just over a quarter (27%) say that their adviser routinely explains the benefits of tax efficiency, deferment, and management.
That is reflected in the research with advisers which found only just over half (52%) saying that clients fully use their ISA allowance each year. On average 47% use their pension investment allowance and only 50% fully use their £2,000 dividend allowance whilst the same number fully use their annual CGT exemption of £12,300 each year.
This represents a tremendous opportunity for advisers to re-double efforts to show and explain the power of products such as investment bonds in financial planning. Outlining the role of bonds will help advisers to support clients with good financial outcomes as well as making full use of a structure ideally suited to current taxing times.
