Experts agree on necessity of diversifying tax wrappers

But given how tax-efficient wrappers are constantly tinkered with by successive governments, what role should they play in financial advisers’ investment recommendations?

During a panel discussion at a recent FTAdviser masterclass on tax-efficient investing, Alex Foster, a partner at RSM UK, said: “I think it is important but should not be a main focus. For myself it is very much about the client being aware of various outcomes from the outset so there aren’t any nasty tax surprises.” 

She added: “It is not so much that tax should drive the investment but it should very much be part of the initial discussion.”

But a member of the audience challenged the panel’s view that investments should not be driven by tax.

Key Points

• Tax should form part of an initial adviser/client discussion to avoid nasty surprises.
• It is important to diversify tax wrappers, such as using Isas as well as pensions.
• The government may tinker with tax reliefs.

He said: “I am a bit surprised that you downplay tax in investing. If you said to somebody on the street there is an investment where, for certain people, if they invest in it on day one, it does not go up by 1.5 per cent a year, but goes up by 66.66 per cent – it goes into a fund that will pay no tax for the rest of its life... they would rush to make the investment.” 

Panellist Ian Dyall, technical manager and head of estate planning at Tilney Financial Planning, explained: “From an advisory angle and from an estate-planning perspective, you can talk purely about inheritance tax, but that is not what is going to motivate people to take actions.”

Isas versus pensions 

The panel, which discussed ‘Where does tax fit in investment choice?’, also touched on the topic of diversifying tax wrappers by having a combination of tax-efficient investments in a portfolio, primarily Isas, rather than relying solely on pensions. 

Mr Dyall said: “If you are trying to make the most of your income tax allowances, your savings allowances, dividend allowances etc, you need all the investments to take advantage of the tax wrappers.”

He suggested: “One of the big advantages that Isas have over pensions is flexibility. For somebody of my age – and I have been through several phases where my job has been kind of dicey over the last few years, companies have been bought, etc – having a great amount of money in pensions, obviously the tax-efficient investment that it is, doesn’t help me.”

John Barnett, partner at Burges Salmon agreed: “At a macro level, Isas are a more honest tax relief because you get taxed this year, and you get the tax relief year-on-year and each government can make a decision year-on-year.” 

The fact that Isas have more flexibility and provide immediate access to cash was pointed out by several of the panellists, who compared this to pensions, which only allow savers to access the cash at a certain age. 

Mr Dyall said: “For younger people who have got financial pressures and do not know what the future is going to bring, they should have pensions, but they need access to Isas as well.”

He added: “There is one type of arrangement being considered, called a sidecar arrangement, whereby you pay into your pension but you also build up an Isa. One of the advantages of that is people like to have a lump sum, but they do not have to take it.”

Tax predictions 

The panel implied that investors should not rely on pensions as a sole tax wrapper. 

So what is the outlook for legislation around certain tax wrappers?

“At a macro level, I prefer Isas. The idea is that you can get tax relief on your Isa on 40 per cent and pay tax relief on your pension at 20 per cent – you can organise it that way,” said Mr Barnett. 

He added: “But I do not think that is going to last forever. A flat rate pension or rate of tax may well come in within the next few years.”

I could see a Corbyn government making some fairly drastic changes. But how do you plan for that? How do we deal with clients?Ian Dyall

Mr Barnett made two predictions about how tax relief might change in the coming months. His first prediction was a potential reduction in enterprise investment scheme relief. 

“With EIS relief, I think we have gotten used to it since 1999, thinking of it as a god-given right. And I think we just need to expect EIS to keep on shifting around as the government sees different things,” Mr Barnett said. 

Under the EIS, investors can invest as much as £1m a year into a qualifying company, for which they receive 30 per cent income tax relief. After three years, the investment gains are exempt of capital gains tax and IHT. 

The Autumn Budget in November 2017 saw Chancellor Philip Hammond tighten rules on the types of companies EIS can invest in, with the aim of fostering investments in “knowledge-intensive firms”, or companies that can contribute to overall economic growth. 

On business relief, Mr Barnett noted: “I can really see them introducing a personal company tax, and then aligning it more with entrepreneurs’ relief – maybe [that looks like] a 5 per cent owning threshold. Maybe you see a CGT uplift.”

Malcolm McLean, senior consultant at Barnett Waddingham, said Mr Hammond could increase pensions tax relief for basic-rate payers. “He may help the millions of people who are on 20 per cent relief at the moment and will be increasing that to 25 to 28 per cent, rather than selling it as a reduction in higher-rate tax relief – which it is, of course. It is a question of whether Theresa May would have the nerve to support such a reduction.”

The Corbyn effect 

With just a month to go until the UK’s departure from the EU, the experts weighed up how a Jeremy Corbyn government would impact various tax wrappers, should Mrs May fail to get parliamentary approval for her Brexit deal and trigger a general election leading to a Labour government.

Mr Dyall said: “I could see a Corbyn government making some fairly drastic changes. But how do you plan for that? How do we deal with clients?

“It is very difficult to plan today for something that you do not know is going to happen tomorrow.”

Mr Barnett added: “Let me just give you one scare story. The remittance basis for non-doms has always been a basis of taxation. You get taxed on them, there is just a delay.

“The Labour government could say, ‘We are going to deem all offshore funds to be remitted this year.’ Then you get a big tax charge in one single year.”

He continued: “I think even a very left-wing Labour government would not change retrospective taxes, but retroactive – changing the tax in the future depending on your behaviour in the past – I think they could.”

Saloni Sardana is a features writer at FTAdviser and Financial Adviser