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Value added tax

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

inextricably linked.

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&#39s 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

competitive advantage.

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

impact positively.

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&#39s 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:

Earned income.

Investment income.

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.


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Merrill Lynch HSBC – FTSE 100 Growth Protected Investment Product

Wednesday, 18 July 2001.Type: High interest account.Minimum-maximum investment: £5,000-no maximum, Tessa Isa £9,000.Interest rates: Up to 35 per cent of growth in FTSE 100.Term: Three years.Offer period: Until September 6, 2001.Withdrawal penalties: No withdrawals permitted during term.Tel: 08456 030405.

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Britannia Building Society is rolling out a new discounted mortgageproduct offering a rate of 4.79 per cent for the first two years. The new rate applies to mortgages up to 75 per cent loan to value whileloans up to 95 per cent LTV, a rate of 4.99 per cent applies. The product has a £295 […]

Bristol & West in tied deal with ZFS

Bristol & West is establishing a tied arrangement with Zurich Financial Services. The new relationship will give B&W customers access to a range of Eagle Star products including investments, life insurance, critical illness insurance, Threadneedle funds and Allied Dunbar pensions.

Keep calm and carry on?

We British are known for our stiff upper lip and just getting on with things. It’s part of our quirky cultural behaviour – like forming orderly queues, or saying sorry when it’s not our fault. Many of us just aren’t that great at talking about what’s bothering us. But if someone feels that the stresses […]


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