I read an article recently, not unusual for me I know, as I try to keep up with the ever-changing world of finance, technology, and more. This particular article, however, caused me to stop, re-read the headline a couple of times, and refresh my coffee before returning to check it again. Here is the headline in question.

“Demand for tax-effective investment advice is likely to increase…”

This prompted me to ask myself, “Why would you invest in something without fully understanding the tax implications?” Good question. As financial planners we don’t focus solely on returns, we concentrate on delivering good client outcomes. Sure, returns play a part, but the investment portfolio is a subset of the overall plan. The potential tax implications of any portfolio and product or tax wrapper it sits within can have a sizeable impact on its return. Understanding how each product is taxed, and how to fully utilise the available allowances and reliefs can add substantially to the client’s bottom line.

We know the tax system is complex, some would describe it as labyrinthine, so we invest time with clients to raise their understanding around the range of tax allowances and the tax reliefs available. This has become more important since the freezing of tax allowances which has seen significantly increased inflows into the Treasury’s coffers. People who never considered or expected to join the ranks of higher, and additional rate taxpayers are forming an ever-lengthening queue.

Reducing capital tax allowances has proved to be equally rewarding for HM’s Treasury with significant rises in receipts for Capital Gains and Inheritance tax. Not to be outdone, what used to be incidental taxes such as insurance premium tax (IPT) have grown into fully paid-up members of the multi-billion revenue club. In 2021/22 the revenue from IPT was £7.34bn. This is mainly due to the growth in private medical schemes as employers and employees lose confidence in the ability of the NHS to address its growing waiting lists.

The research conducted by HSBC Life, found that 50% of surveyed advisers’ clients are higher-rate taxpayers while 32% are additional rate taxpayers.

Despite this, the study revealed:

  • 39% of advisers do not routinely discuss tax efficiency as a core part of a financial plan.
  • 27% of clients reported that their advisers routinely discussed tax-efficiency of investments.
  • 52% of investors use their ISA allowance.
  • 47% use their pension allowance.

HSBC, who conducted the study, suggested this lack of active discussion on tax may be the reason behind the less-than-optimal take-up of personal tax allowances. Affordability is clearly a factor here, but prioritising tax efficiency within an investment framework is critical to a genuinely successful client experience.

It is worth mentioning that tax efficiency in financial planning is not restricted to growing assets, if anything, it is more important to understand your options when transitioning from growing your capital to withdrawing income. Let’s also not forget the importance of tax planning when it comes to inter-generational transfer plans or philanthropic legacy projects.

Given the percentage of higher and additional rate taxpayers within the client population you might have assumed tax efficiency would have been a top priority for advisers. It should be an ideal opportunity for them to demonstrate their knowledge and expertise. We know it can make a substantial difference to client outcomes. Also, let’s not forget the potential impact on the next generation likely to inherit the rewards of all the hard miles of planning work their parents and grandparents undertook on their behalf.

We know tax is a complicated subject, which is why we focus our energy, training, and client conversations on doing our best to help clients understand their allowances and establish financial priorities that maximise their returns.

Perhaps it’s because we are just out of tax pack season, where we prepare comprehensive tax statements for clients to assist with completing their self-assessment returns, that the title stopped me in my tracks. Thankfully, the coffee got me going again!