Demand for Tax-Efficient Investment Advice Likely to Surge, According to HSBC

According to a recent report from HSBC Life UK, there is likely to be an increase in demand for tax-efficient investment advice. This presents a significant opportunity for advisers to showcase their expertise and grow their businesses. The report, titled “The Three I’s of Investable Capital,” in collaboration with consultancy firm Technical Connection, found that 82% of advisers’ clients are higher rate or additional rate taxpayers. However, surprisingly, two out of five advisers do not routinely explain the benefits of tax efficiency on investments to their clients.

The research conducted by HSBC Life UK revealed that 50% of surveyed advisers’ clients are higher rate taxpayers, while 32% are additional rate taxpayers. It also found that advisers believe taxation is the second biggest threat to their clients’ invested capital and future financial well-being after inflation. Out of the advisers surveyed, 35% cited inflation as the biggest threat, while 27% selected taxation. Volatility and low returns were considered the biggest threat by only 19% and 18% of advisers, respectively.

However, despite the importance of tax efficiency, the research showed that 39% of advisers do not routinely discuss this aspect with their clients. Only 27% of clients reported that their advisers routinely discuss the tax efficiency of investments. Interestingly, almost all (98%) of the advisers surveyed consider tax efficiency on capital investments to be important, while slightly fewer (96%) of the clients share the same sentiment.

The report also highlighted that the underutilization of basic tax allowances could be partly attributed to the lack of discussion surrounding tax efficiency. On average, advisers estimated that only 52% of their clients fully utilize the ISA allowance, and just 47% take advantage of the pension investment allowance. The study also found that only one in five (20%) clients fully understand how insurance-based bonds work.

Mark Lambert, Head of Onshore Bond Distribution at HSBC Life UK, emphasized that the proportion of clients who are additional rate or higher rate taxpayers is expected to increase due to frozen thresholds, allowances, exemptions, and wage inflation. This indicates that clients are more likely to seek and require advice on tax-effective investment. Lambert stated that advisers have the opportunity to promote the benefits of tax allowance optimization through regular tax health checks. He also noted that despite clients’ concerns about inflation and interest in tax efficiency, advisers believe that a relatively low percentage of clients are aware of or utilize key strategies.

The HSBC Life UK report analyzes different types of investable capital assets, including equities, collective investments such as unit trusts and OEICs, ISAs, onshore and offshore bonds, defined contribution and defined benefit pensions, VCTs, EIS, SEIS, structured investments, and crypto investments. It sheds light on how capital investments can be structured to achieve intergenerational planning and estate planning, as well as the role of initial and ongoing advice in ensuring the optimal outcomes from capital investments and their future tax treatment.

The report specifically highlights the advantages of onshore bonds, which offer zero tax on cash dividends at a policyholder level, while non-dividend income is taxed at 20%. Gains within the bond are subject to UK life fund taxation, meaning the policyholder is treated as having paid the basic rate tax on these gains. It also mentions features such as top slicing relief and 5% per annum tax-deferred rules on withdrawals. Lifetime transfers through assignment without exchange of money or money’s worth are not taxable events, and the basic rate tax credit continues to determine policyholder tax on realized chargeable gains.

HSBC offers the Onshore Investment Bond, which is a tax-efficient medium to long-term lump sum investment wrapper. It can be accessed with a minimum investment of £15,000 and provides potential for capital growth while allowing clients to make withdrawals from their investment. This bond offers clients access to around 3,800 funds through an open architecture system.

In conclusion, the HSBC Life UK report highlights the potential benefits of tax-efficient investment advice and the need for advisers to communicate the value of tax efficiency to their clients. With an increasing number of clients falling into higher tax brackets, the demand for expert advice on tax-effective investments is expected to grow. Advisers have a great opportunity to help their clients optimize their tax allowances through regular tax health checks. By emphasizing tax efficiency, clients can make the most of their investments and secure their financial future.