Tax Efficient Investments  

Taxing questions for financial advisers

Kevin O’Donnell

Kevin O’Donnell

News last week of yet another tax crackdown on wealthy individuals may seem initially to be good news for financial advisers – who may well be called on to give advice – but long term I believe advisers are in dangerous territory if they see their primary role as just to advise clients on ways to avoid tax.

According to a report from the National Audit Office, HMRC is running an enquiry into the tax affairs of about one in three high net worth individuals. It is right that HNW individuals pay their fair share of tax, but the news is tempered by the fact that we are only talking about 6,500 individuals, or 0.02 per cent of all taxpayers who would qualify as HNW.

Despite this, the sums are large, with the potential value being chased standing at £1.9bn, of which £1.1bn relates to "marketed avoidance schemes". It is believed that about one in eight HNW individuals has used at least one avoidance scheme.

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These schemes could include offshore arrangements, film schemes, forestry investments and the like.

Many IFAs will see these as the province of clever and creative accountants who spend huge amounts of time scrutinising Treasury tax rules for loopholes and keep-out-of-jail schemes. Some celebrities have, of course, had their fingers burnt by more than one of these schemes, even reportedly expressing surprise that claiming to be a secondhand car dealer to dodge tax was in any way suspect.

The issue for me is where the dividing line lies between the more exotic and risky tax avoidance schemes set up purely to dodge tax and legitimate tax planning advice. It is, of course, appropriate that everyone pays their fair share of tax, but I am sure many advisers will have been in the position where clients want to push the envelope.

Perhaps they ask: “Is there anything else we can do to save more tax?” More exotic, but legitimate schemes, such as the now ended Liechtenstein Disclosure Facility, may even have been discussed.

Tax is a complex area and increasingly so. It is now at the heart of what many IFAs, financial planners and wealth managers offer to clients. In the US, tax advice is massive business. 

Here the government has introduced plenty of ways for people to avoid tax legitimately: a growing plethora of Isas, reasonably generous pension saving rules, CGT benefits, income tax allowances and the like.

With all these tax incentives one would imagine that few would need even more schemes, but those with ‘lumpy’ earnings will perhaps always look for tax nirvana. Greed is a big motivator.

I  have heard many advisers say that tax complexity is their bread and butter. Understanding and making good use of tax mitigation schemes for clients is a key part of what they do, and I understand this. Few clients will know about all the tax efficient schemes available and it is right that IFAs are, at least in part, tax counsellors for their clients.