“The Tax Tail must never wag the Investment Dog” is the frequently quoted phrase about the effect of tax, and generally this is quite right. I often look with astonishment at some of the intricate structures that are often promoted by clever tax advisers to bemused and confused clients. We should be wary of schemes that seem too sharp and too clever by half. These days we must be clear that with the government (of any political colour) being short of money, its tax hounds in the form of the HMRC will be baying for the blood of not just tax evaders but those sailing too close to the wind as tax avoiders.
For most of us tax is relatively straightforward, but it still requires planning and to be linked into our investment aims. However, we should regard tax facilities as being not too dissimilar from a Mars Bar wrapper – it may be pretty, it may be durable, but if the contents are stale then it is just a worthless wrapper. It is the investment content that is the key issue – the wrapper is there just to enhance the value, not provide the value.
Thus, for example, an ISA can provide a tax free environment for investments which can be very valuable, but if the investments themselves fail, then it doesn’t matter what level of tax you are paying; 20% of zero and 40% amount to the same nice round number! This applies just as much to pensions, as many sadly will have found over the past few years when they look at the performance of their “closed” pension funds when they get around to retiring.
Another vital issue is cost. Care is needed here. Sometimes the charges are stated and on other occasions they are more covert and take the form of internal “deductions” and costs. With the advent of the Retail Distribution Review, front end commissions have been banned and so for products like off-shore bonds, the old habit of some outrageous front end fees of 7% should be a thing of the past. However, as consumers, please be aware that greedy product sellers will always try to find other ways of stealing and slicing off part of your assets for their own gains.
These days good providers should be absolutely clear about tax wrapper costs and charges and many are now much lower than before. ISAs are now often provided without a charge and the SIPP costs have come down dramatically. However, we should also take into account other tax opportunities which will benefit both ourselves and our families. Capital gains tax exemption is a valuable (£10,600per annum at present) benefit but needs to be managed each year. Additionally, the threshold for paying inheritance tax can catch us out unless managed in advance (£325,000). This is a cost which one can sensibly and legally avoid but it does require some forward planning within the family.
However, one thing we should all remember is that tinkering Chancellors will always change the tax rules and history shows us how the tax regulations have grown hugely over the past two decades. Thus what may have been a perfectly well applied tax structure for your investments may well alter in the various budgets of the government. Therefore, we all need to keep such tax structure under review and adjust as necessary.
The answer therefore is to use all your tax breaks to your benefit, whilst making sure that these tie into your investment intentions and also into your longer term financial planning. The key here is for effective co-ordination across all those disciplines – something difficult, but worth doing. You can avoid a lot of tax liability quite legitimately but you can’t evade it. Thus with our tax breaks, we use them or lose them.