How tax efficiency plays a role in our advice

The role careful tax planning has on investments and other financial arrangements is hugely understated in our opinion. All too often we meet prospective clients with buy to let properties or businesses who have earmarked these assets for their retirement pot, without accounting for the fact that up to a third of the profit made could be taxed. This is likely to provide quite a shock when this is realised, and is usually discovered at the wrong end of the planning process, namely the end stage when nothing can be done about it! The ultimate fallout in this scenario is people having to work on longer than they want to, or having to tap into the equity in their own residential property to provide sufficient net income.

Similarly, people remain in a wide spectrum of investments, from endowments through to investment bonds, which for a lot of people means having to pay income tax personally or through the investment provider quite unccessarily, and without them even knowing about it. Of course there are other advantages to being invested in these type of products, but regular analysis is usually worthwhile to explore redirecting your money to product types that allow you to minimise or eliminate any tax paid on your investment income and capital gains.

Tax efficiencies usually start with utilising all the tax fee allowances available to you. My first example of this is a married couple with an £10,000 tax free income allowance each (for tax year 2014/2015). If the stay at home wife or husband isn’t working, this will go to waste unless it is utilised within the couple’s investments. If they are invested in a product whereby the provider is obliged to pay 20% tax on income/growth with no way of you reclaiming this personally, unnecessary tax will have been paid. We will advise on strategies whereby money can be transferred to other products in the non working partners name, allowing you to declare the income personally and offset it against your tax free allowance. This can also separate such income away from a 40% or higher rate tax payer for obvious benefits.

The second example is utilising capital gains tax free allowances, which for 2014/2015 is £11,000 per person. With further planning, you can pick an investment environment, with specifically low income paying funds, that categorises any growth as ‘capital gains’ rather than income in the main. This means that you can rack up your gains in this way and offset them against the £11,000 CGT free allowance (that’s £22,000 per couple). With annual planning, we can look to make fund switches periodically, partly to flush out any gains to ensure that the annual allowance is fully utilised every year.

By minimising your tax bills in the ways just described, this can often give your investments and savings a boost to the rate of growth you’re achieving, just by undertaking a small amount of extra financial planning. If we can manage to save you 20% tax on your annual investment growth, this can have the effect of increasing your growth rate from 4% to 5% every year, without even looking at what the markets are doing!



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