Tax planning has become the latest tool for intermediaries seeking breathing room in client portfolios, as they strain to eke out higher returns without dragging investors further up the risk spectrum.
Though advisers have long advocated the practice of efficient planning for clients, tax allowances have become more prominent in recent years, while vehicles such as venture capital trusts (VCTs) have enjoyed growing interest from the likes of discretionary fund managers (DFMs) and other intermediaries.
This has been accompanied by a darkening horizon for asset allocators, as a low-growth, low-return environment threatens investors’ ability to achieve the same performance as in previous years without taking on a greater level of risk.
Industry figures believe the combination is now translating into a greater focus on tax among asset allocators, as specialists seek to ease the pressure on already strained investment portfolios.
Justin Blower, sales head at Royal London’s Ascentric platform, said: “We have started to get DFMs focused on inheritance tax, using relief on Aim portfolios.
“It’s really hard to chase a yield, but there are the benefits of the tax allocation that advisers have, including capital gains tax and bond top slicing. The tax is reducing risk in your investment portfolio.”
Advisers, meanwhile, though warning not to let the “tax tail wag the dog”, have acknowledged that such strategies could come to the fore for clients.
Mike Horseman, managing director of advice firm Cockburn Lucas, said: “I don’t think you will look at the wrappers and say ‘we will take less risk’, but I think it’s a way of delivering the yield clients want.
“Getting that right puts less pressure on the portfolio having to deliver the excess yield requirement.
“If we look at a VCT for a client, we are getting that 30 per cent tax kick. We wouldn’t buy it purely on the tax wrapper, but it helps.”
Those who invest via pensions or Isas will have little need for such strategies because of the tax-free status of their wrappers, but others could be aided by such moves.
Matthew Harris, owner of Dalbeath Financial Planning, said: “For clients who hold money in a taxable vehicle, getting the first £1,000 of income and £5,000 of dividends tax free eases the pain a little.
“For a certain group of investors those allowances make a small difference.”
Some portfolios can now directly target specific forms of tax relief. Brown Shipley’s Aim portfolio service offers inheritance tax benefits because stocks on the small-cap index qualify for business property relief.
But others have warned investors not to be led by tax considerations.
Dan Farrow, a chartered financial planner and founder of SBN Wealth Management, described VCTs and enterprise investment scheme (EIS) offerings as “marginal products for those who have exhausted their allowances, paid off debt, and have enough to pay high charges with a slim prospect of getting some return, all in the name of tax relief”.
He also said that tax relief was unlikely to reduce risk, and urged advisers to stick to the basics.
“It may sound like I’m reading from an FCA bulletin, but the process is simple,” he said.
“We’ll never get it right all the time, but it’s when advisers deviate from simplicity that it all goes wrong.”
VCTs: Tax-efficient but high risk
The UK government has backed a number of tax-efficient vehicles that have enjoyed significant demand in recent years.
Among these are VCTs, which offer a mixture of risk and attractive benefits.
Those considering VCTs need to be aware that they typically invest in unquoted shares, including new shares from privately owned companies and issuances on the volatile Aim indices.
As the government notes, its VCT scheme is “designed to encourage individuals to invest directly in a range of unquoted smaller, higher-risk trading firms”.
The beneficial tax treatment for VCTs is notable. This includes tax-free capital gains and dividends, and a 30 per cent rebate on income tax applied to the initial investment, provided certain conditions are met such as holding a VCT for at least five years.
