No adviser needs reminding of the importance of using up the Isa allowance. Unfortunately, some investors still do. The sole advantage of an Isa is tax, yet our research has shown time and time again that the public still does not really get the potential tax benefits. The trite phrase “tax- advantaged” does not do the Isa justice and lacks the substance required to express how tax planning increases total return.
Advisers can add a dimension to Isa planning that simply is not available elsewhere. By applying simple knowledge, we can better explain the tax value of an Isa, ensuring the allowance is used to its best potential tax effect, and also help clients to avoid funds that can be Isa tax traps.
Even a simple approach can start to give meaning to “tax-advantaged” and allow judgments to be made on how the Isa allowance might be used. For example, consider a sum of £100 earned outside an Isa. Then explain how much more that £100 would be inside an Isa.
If the return is interest from a fund, then an additional £25 is added for a basic-rate taxpayer, £67 for a higher- rate taxpayer and £100 for an additional-rate taxpayer. If the return is capital growth, otherwise taxable, the additional return is between £22 and £39 for a basic-rate taxpayer and £39 for those above basic rate.
If the return is dividends, there is no additional return for basic-ate taxpayers, £33 for higher-rate taxpayers and £57 for additional-rate taxpayer. As an alternative to explaining tax saved, it can be clearer to explain what the taxman effectively adds to the Isa.
More complex analysis can be undertaken with online tax wrapper analysis tools. These tools can be used to analyse a single Isa contribution, either in isolation or as part of a bigger portfolio. They can also analyse existing Isa pots to ensure ongoing tax-efficiency.
With a tool, it is possible to quantify the overall potential tax benefit from an Isa. This illustrates clearly to investors just how valuable your tax planning service is to them.
It is also important to understand that certain structures of funds may not be as tax- efficient as others within an Isa, in particular, some mixed asset funds and some property funds.
The problem arises where underlying assets are taxed within the fund itself and the Isa manager cannot recover this tax. With some property funds, the rental income is taxed within the fund and cannot be recovered whereas with other types, the rental income comes to the Isa investor tax-free.
The same goes for some mixed equity and bond funds, where sometimes the bond interest is taxed in a way that it cannot be recovered and sometimes not.
None of this implies that funds should be avoided merely for tax. However, there is often a choice as to which funds to place inside the Isa and which to place in other wrappers.
Paul Kennedy is head of tax at FundsNetwork