Last week, I looked at the importance of advisers who offer a fee-based advisory service (however the adviser charge is made) in concentrating on the promotion and delivery of advice in areas that their clients will value… and pay for. According to the excellent JP Morgan research report ‘Winning Propositions’ this will (thankfully!) include tax planning. The JPM report also noted that consumers valued an adviser who made them aware of a need, risk or opportunity relevant to their financial wellbeing.
Taxation and tax planning is certainly an area that is constantly changing and therefore a fertile ground for those advisers seeking “reasons to be proactive”. So with strong and continuing publicity on tax, reasonably strong reported consumer interest in tax planning and a good flow of “reasons to be tax proactive” what could go wrong?
Well, how about HMRC’s attempts to stop tax planning? But what is it looking to stop? All tax planning or just tax avoidance that fails the HMRC “sniff” test? Well, it’s the latter fortunately. And the test is in the shape of the proposed General Anti-Abuse Rule.
The draft legislation has been issued for consultation and, while being wider in its application than targeted anti-avoidance rules (that have largely caused the more general rule to be proposed), it is not as wide as a general anti-avoidance (note, avoidance, not abuse) rule would be. The latter will, it is generally agreed, have required a robust clearance mechanism to accompany it. And that is something the Government did not want to commit to.
The proposed new GAAR needs to be considered by planners together with the proposed new cap on tax relief and the new provisions going under the heading of “lifting the lid on tax avoidance”.
Without “doing the detail”, the cap on the amount qualifying for income tax relief of the greater of £50,000 and 25% of “adjusted total income” only applies to reliefs that do not already have their own cap. So that means pensions, ISAs, VCTs, EISs etc are unaffected. And, famously, charities too are also unaffected.
And “lifting the lid”? Well, that’s mainly about tightening up the DOTAS provisions and executing and sustaining a campaign of publicity over schemes that HMRC/Treasury believe should be avoided.
So what does all of this mean to financial planners? Is all of this tax news negative or positive ?
Well, if you are of the school that believes that any publicity is good publicity, more tax publicity must be good – especially against a background of expressed consumer interest in tax and tax advice.
But does all this concerted government action mean that the opportunities for tax planning have been limited? Well, at one level, yes. Tax avoidance that falls foul of the GAAR (by delivering tax advantages in an abusive way outside of what was contemplated by Parliament when drafting legislation where the securing of a tax advantage was the main motivation) will definitely be hit. Obvious examples include sideways loss relief schemes and other loss delivery schemes that often deliver more in tax relief than is committed commercially. No surprises there.
Evidence is, though, that few financial planners will have had these plans as a core element of their planning armoury.
So the conclusion is that the outcome of all this tax activity is good.
Consumers are concerned about tax.
Consumers are prepared to pay for tax-saving advice.
HMRC is maintaining a “high tax publicity” campaign around tax and tax planning.
But while tax is likely to remain in the news and consumers are definitely concerned, advisers will need to exercise “extreme proactivity” to make the most of the opportunities to plan that all of this change offers.
Just consider these acceptable tax planning opportunities that are available for the following categories of client:-
Ensuring that tax wrapper choice is optimised to deliver “tax alpha” and maximise post-tax returns
Ensuring that wrapper allocation is considered to minimise tax risk
Making sure that tax allowances are maximised for the family, and especially between couples
Making sure that they consider all possible ways to tax effectively provide for the costs of education, higher education and first property purchase for their children.
For business owners:
Ensuring that they choose the most tax effective way to extract funds from their business and give full and proper consideration to planning for a financially attractive retirement. The danger and risk inherent in the reliance on the SME owner’s business as their sole means of future financial security should be seriously challenged.
Estate planners should be encouraged to consider how investment and trust-based solutions might help them to plan with retained control over, and access to, investments. To the extent that planning to reduce the liability is not possible, serious thought should be given to the use of protection life policies in trust to provide for the liability.
Just a few of many “reasons to be proactive” with some key client segments. None of the areas for proactivity with the use of tried and tested financial strategies, products and propositions we have touched on would, I believe, be adversely affected by the GAAR, the cap or lifting the lid on tax avoidance.
A perfect storm of proactivity potential.
Tony Wickenden is joint managing director of Technical Connection