How can one encourage clients to take tax planning more seriously, and not to leave it till the last minute each year?

Respondents to this guide have suggested several top tips to help hammer home the importance of timely tax planning, without making rushed decisions.

Tracyann Kneen, product technical manager at Nucleus, states: “Just as an individual’s life can be viewed in cycles so too should tax planning.”

“At any given point, an individual may be juggling a career with raising a family, or thinking of a comfortable retirement with an increasing focus on passing wealth tax efficiently to the next generation.”

For Ms Kneen, top of the list for advisers is to “help their clients regularly take stock of where they are in their life cycle and to explore the tax planning options that will help them achieve current and future financial goals”.

But it’s important to help clients understand what their goals, their liabilities and their tax allowances are in the first place, says Ian Battersby, business development director for Seneca Partners. That way, he says clients can “plan their tax strategy in advance of liabilities falling due, to help manage their cashflow”.

Make the most of the Isa allowances

James Nield, investment manager for Thesis Asset Management, comments: “It’s important to make the maximum use of Isas for the whole family, including junior Isas (Jisas). “With interest rates as low as they are at present, consider transferring cash Isas into stocks and shares Isas, and keep cash reserves outside of the Isa wrapper.

“Most investors can earn between £500 and £1,000 of savings interest tax free now, so sheltering cash from income tax in an Isa wrapper might not be the most efficient use of the Isa wrapper.”

Make the most of other allowances

Take into account the various allowances available (before the Chancellor takes them away), such as the annual gifts exemption, small gifts exemption or charitable donations.

As Tim Morris, IFA for Russell & Co, advocates: “Know your annual allowances: pension, Isa, personal savings allowance, dividends, IHT, venture capital trusts, enterprise investment schemes, capital gains tax and income tax.

“It’s a lot – but use it; don’t lose it. Basically, get financial advice.”.

Mr Nield adds: “Where possible spread income and assets between spouses as a married couple to make the greatest use of allowances and exemptions.”

It is also worth for certain clients still in employment to consider salary sacrifice for those earning, for items such as childcare vouchers or pension contributions.

Make the most of new Isa rules

According to Rachel Winter, senior investment manager at Killik & Co, investors should become more familiar with the latest changes to the Isa rules so they can benefit from the greater flexibility these entail.

She explains: “Any money taken out of an Isa in the current tax year can be put back in within the same tax year, over and above your subscription allowance.

“For example, if you take out £100, you can put that back in this tax year over and above your £20,000 contribution.

“If you take out £100,000, you can put that back in as well as your £20,000 contribution.”

Ms Winter says this could be useful for someone that has withdrawn money for a reason which ultimately fell through, as they can put the money back in.

She adds: “It is also useful for income investors who have some stocks in an Isa and some outside. At the end of the tax year they can add up the amount of income that has been taken out of the Isa, and replace this using assets from outside of the Isa.”

Lower your exposure to dividend tax

Chancellor Philip Hammond struck a blow to people relying on tax-free dividend income, when he slashed the allowance from £5,000 a year to £2,000.

This means if people hold dividends outside of an Isa, and the value of the dividends is above £2,000, they will be subject to income tax.

According to Mr Nield: “Make use of the annual dividend allowance by arranging affairs accordingly.”

For example, the potential to be hit by income tax on dividends can be mitigated by clever management of one’s Isa allowance.

According to Ms Winter: “Look at what you have in and out of your Isa and see if you are going to be affected by this reduction in the dividend allowance – if you are, see if you can reshuffle your investments to lower your exposure to income tax.”

Moreover, she advocates explaining the ‘bed and Isa’ transaction to clients. This is the process by which you sell a stock from outside your Isa, immediately move the proceeds into the Isa, then repurchase the stock.

By doing so, the client is keeping the stock but switching the account in which it is held. She adds: “This type of transaction can be used to fund your Isa, and also to crystallise a loss or a gain outside of the Isa.

“Crystallising a gain will make use of your capital gains allowance, whereas a loss can be offset against capital gains in future tax years.”.

Hoskins’ Five Top Tax Tips
1) If it sounds too good to be true, it probably is.
2) Don’t delay – do it today!
3) The tax tail should not wag the investment dog.
4) Use it or lose it.
5) Look at the underlying investment strategy, not just the tax wrapper.
Source: Richard Hoskins of Kin Capital

Realising investments from a shares portfolio is good practice, according to Daniel Rodwell, managing director of GrowthInvest, because of the potential benefits around capital gains tax.

He says: “Consider realising capital gains annually from your share portfolio to use the annual CGT exemption as well as CGT deferral or offset available with certain investment products.”

Consider other options

After the pension and the Isa allowances are maxed out, it is worth considering whether clients can benefit from using venture capital trust (VCT) or enterprise investment scheme (EIS) investments.

Mr Rodwell continues: “These are good for clients affected by the lifetime pension restrictions.

“With tax reliefs broadly comparable to pensions, these products target significant capital growth over the long-term.”

As the funds mature, funds can be reinvested, gaining additional tax relief, or drawn down free of tax, providing what he calls “significant flexibility” when approaching retirement age.

Add to this the annual investment allowances are higher – as much as £2m for an individual investor in a knowledge intensive EIS – and it is clear this could be a potential option for your ultra high-net worth clients.

Moreover, business relief-qualifying investments, such as unquoted or certain Alternative Investment Market (Aim) listed companies can help with estate planning.

Mr Rodwell adds: “If held for two years, these investments fall outside of the clients’ estate, enabling them to pass these shares to beneficiaries tax-free.”

Of course, this has to be balanced against the individual’s personal financial situation, the suitability of the investment for the client’s particular circumstances, and with full regard to the client’s attitude and resilience to, investment risk.

Mr Battersby states: “Understand you are making an investment decision, not merely trying to reduce the tax you are paying and be aware of the risks behind the decisions you are making.”

For more information, the EIS Association has produced this useful breakdown for financial advisers, looking at EIS, which also contains some case studies.

Keep it personal

Tax should not be a last-minute, tick-box exercise at the end of the tax year.

As Rachael Griffin, tax and financial planning specialist for Old Mutual Wealth, comments: “Tax planning can be challenging, but starting early, making use of allowances and seeking advice can make the challenge less daunting.”

After all, a lot can happen in a year: divorce, sickness, death, birth, marriages and fallings-out with the horrendous daughter-in-law. Therefore, advisers should make the most of regular reviews or changes in a client’s personal circumstances to review and, if appropriate, change their tax planning strategy.

As Nucleus’ Ms Kneen adds: “Above all, tax planning – from claiming tax reliefs and allowances, as well as making tax-efficient investments – will only be good for a client if it’s appropriate to their personal circumstances.”

Click here to read the article, or click here for the Guide to getting tax planning done early.

Source: FT Adviser, by Simoney Kyriakou



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