The effects of the much-anticipated Labour budget are beginning to sink in. We spoke to Rebecca Bonner, Director & Independent Financial Adviser at Trigpoint Financial Planning, for a two-part series
discussing the changes we’re seeing and the place of financial advisers in helping their clients understand and navigate tax changes.
The general consensus seems to be that the budget hasn’t been as brutal as many feared, what are your thoughts about the budget as a whole?
I think initially perhaps the implications of bringing personal pensions into inheritance tax were underestimated, that could be huge. It will affect a lot of people, possibly more than increased capital gains tax.
Thankfully, they protected the tax-free cash element of pensions. Now we've got some certainty, everybody can work with it, although we do have a period of consultation where the detail isn’t clear. At least a timeline of implementation is available.
"It was the uncertainty and the length of time we had between Labour being elected, and its budget that really affected businesses."
With capital gains tax, in the end there was a fairly modest rise, 20% to 24% for the high-rate taxpayers. Do you think that's going to make a material difference to people’s investment choices?
I don't think it will make too much difference. It was a smart move to not significantly increase it because it's enough to collect more revenue, but I don't think it will influence behaviour. The government uses taxes to influence behaviours. They're trying to make people either not smoke, or not drink too much alcohol by having the duties, or they give tax incentives and tax reliefs to encourage investment in a few areas or in UK businesses. If we look at it in terms of the influence on behaviour, I don't think this marginal rate change will actually do that.
How do you advise people trying to look ahead while we’re in this period of limbo?
People trying to make decisions using a crystal ball of what the newspaper has said on any given day, that's a really difficult one. Understanding a client’s objectives is absolutely key. Trying to work out whether a change in legislation would materially affect their plan is something that we always have to consider. We need to have the conversations. My standpoint is, if we don't know what's going to happen, we don't take action on it, unless that change, if it came in, would detrimentally affect their position going forward significantly.
What kind of strategies have you learned to educate clients when thinking about tax and their investments?
I've tried to understand clients' views on tax, which all differ. Most people accept that in the UK, they need to pay tax, they've got a lot of services that have to be paid for. It's about making sure that that is done fairly, and people understand when they're going to have to pay it. From an investment perspective, I like to have an open discussion about views on paying tax and timing. Some people have been fans of offshore bonds as wrappers. You can put money into an offshore bond and then it can grow income and capital gains tax-free, but when you take the money out again, it's subject to income tax instead of capital gains tax. People may start to look at bringing those in again. I know there was lots of talk about it when everybody thought that capital gains tax was going to go back up to the same level of income tax. Now that that's not happened and it's only a slight increase, they are unlikely to be as prevalent as anticipated.
There can be a problem with people not really wanting to change their investments and the risk strategy, to prevent triggering a tax charge, but then they would end up in a wrong risk profile.
It can be a real concern and so looking at different wrappers is important, however it’s important to remember capital gains tax is still relatively low.
"Paying some of that tax as you go along by regularly rebalancing means you're dealing with certainty."
If you end up buying say a single multi asset fund and then capital gains tax rates go up to 30% or 40% then if you've deferred all of that gain, when you eventually come to realise it, you'll be paying higher tax. There's a lot of comfort in paying the tax with certainty of the rate at which you will pay it. You only ever pay the tax if you make the money.
Nothing in this article should be deemed to constitute the provision of financial, investment or other professional advice in any way.