If there is one message that comes through time and time again in this
section of Money Marketing it is that tax planning can substantially
improve the net return on investments and substantially improve the bottom
line for investors. Tax planning and sound financial advice are
Arguably, giving financial advice, rather than merely facilitating the
purchase of a financial product, cannot be effective if consideration is
not given to the taxation aspects of a transaction or strategy.
At its simplest level, effective tax planning can improve the net return
for a higher-rate taxpaying investor by 66.6 per cent. This incredible
figure is reached by virtue of the fact that £100 after tax at 40 per
cent amounts to £60 and £100 with no tax payable amounts to,
well, £100. It does not take an actuary to calculate that £100 is
66.6 per cent greater than £60. End of tax planning lesson number one.
Having a good understanding of taxation and how to minimise it, consistent
with the achievement of a client's main financial objectives, is an
essential part of the advice process. This is true regardless of client
type. Being able to make a financial planning strategy work tax-effectively
is a tremendously valuable attribute that facilitates the adding of much
value and the achievement of much differentiation and, thus, sustainable
Great emphasis needs to be given to tax planning in the construction and
delivery of professional development. Provided there is focus on the areas
in which the adviser anticipates doing business, then increasing competence
in tax planning could yield a very positive return. Taxation is an
incredibly dynamic knowledge base. It is changing all the time and is a key
factor in determining business success.
Like most areas of financial planning, there are many levels of depth and
complexity to tax planning. My gut feeling is that the major impact can be
secured through the application of some of the simpler tax planning
strategies. However, there is a danger that, because of their perceived
simplicity, many of these strategies get aired too infrequently because of
the assumption that the client will have already taken action in the
particular area, so it is not worth raising it again.
This is highly unlikely to be the case since tax planning is not at the
top of the agenda for most people, given the other things in life that one
has to deal with. Things change, so the strategy implemented three or four
years ago may need updating or revising, if only because the numbers are
likely to have changed.
A good example where this is likely to be the case is in tax planning for
couples. The basic strategy is quite straightforward – maximise the use of
allowances and lower tax bands and, as a result, minimise tax. This should
Typical fertile ground for tax planning between couples is where most of
the income or capital is owned by one of the partners. In this situation,
typically, maximum use will not be made of the combined tax allowances and
lower rates applicable to the couple. The trick is to ensure that, viewed
as a whole, the couple's income bears as little tax as possible and capital
growth is similarly lightly taxed, if taxed at all.
Even in estate planning, having assets owned by both of a couple will, in
most cases, facilitate more effective inheritance tax planning. Of course,
merely splitting assets between a couple does not give rise to any
inheritance tax saving, it is what they do with those assets having split
them that gets you to where you want to be.
Returning to minimising income and capital gains tax, then the transfer of
income or capital can be a very effective means to that end.
Income comes in, broadly speaking, two forms:
Ensuring that earned income falls across the couple so as to minimise
their overall tax exposure depends substantially on having control over the
source of that earned income. This most naturally occurs where the parties
have control over the payment of earned income. Typically, this would
happen in any privately-owned business (incorporated or unincorporated)
where one or both of the couple have control over what earnings are paid.
To take the example of the non-working spouse of a shareholding director,
partner or sole trader, there is a clear opportunity to ensure that earned
income is paid to that spouse, placing it in a lower tax environment than
it would have been otherwise, for example, in the hands of a higher-rate
taxpaying employer, where the employer is unincorporated, or in the hands
of a higher-rate taxpaying director/shareholder of a tax-paying company.
When one has control of the source of income, diverting income into the
best tax base makes eminent sense. But there are traps to watch out for and
I will look at these next week.