Chelsea Financial Services MD Darius McDermott observes that tax is getting a higher priority within his firm. Darius, who I was speaking to just to check the tax position on cashing out of with-profits, suggested that his thinking has undergone a pretty radical shift due to tax changes recently.
In the past with Chelsea, it was always a matter of focusing on the investment first and then sort the tax position second. Now he says the opposite may be true and the Chelsea website will see a new information page outlining some of this change in thinking.
For example, while not favouring with-profits, the firm is rethinking what it says about investment bonds in general and certainly about staying in a bond at this moment in time which suggests some advisers may need to reconsider their reconsiderations of the last few years. He also points out that some structured products are providing a huge amount of shelter from capital gains and indeed that anyone, but couples in particular, in the highest tax bracket should definitely be using their full Isa allowance. This is certainly a significant shift in emphasis.
There is a bit of an irony in this. I remember a few years back when Ron Sandler produced his report on the stakeholder suite with what was clearly a lot of help from the Treasury. The report suggested that there was little evidence to suggest that tax incentivising products led to higher take up. I remember thinking there was very little evidence to back the assertion. Recent tax changes are certainly making a nonsense of it now. The public, and especially the higher rate tax payers would be wise to look for all the tax incentives and tax shelters they can get.
The whole bonds versus mutual funds debate has always been clouded by the commission issue. Personally speaking, I can’t see that there was much difference between 3% up front plus 0.5% trail and 6% up front. The customer was paying a broadly similar single charge anyway.
However, some in the industry have used high initial commission on bonds to justify selling mutual funds rather than bonds, although I suspect they may have had ulterior motives.
That argument falls flat now for three reasons: 1) You can buy bonds at a factory gate price and add the style of remuneration that the adviser and client agree upon – this could be the same shape as that tradionally paid on mutual funds for example; 2) Changes to income tax and pensions have pushed the bond ‘tax wrapper’ way up the agenda as a way of sheltering investment income to avoid limits in the tax system such as £100,000 (withdrawal of personal allowance), £130,000 (pensions tax) and £150,000 (50% tax); and 3) You can hold broadly the same mutual funds within a bond wrapper that you can hold direct. Of course, mutual funds also have their tax attractions such as the 18% CGT rate for growth oriented investments (although how long it will stay at 18% with income tax at 50% is debateable).
Those still contending that mutual funds are best in 99% of cases should think again.Bonds should be compared to mutual funds based upon their tax merits. Not upon how much you can make out of one or the other. This will be one positive outcome of the RDR.