Disruptions to the financial advice industry: Are Tax simplifications to blame?

The future holds uncertainty for the tax and financial advice industry, with talks of potential increases in capital gains tax and proposed changes to the inheritance tax regime. Therefore, it has never been more important for the industry to keep clients’ plans flexible and plan for future changes in the short to medium term.

Economic factors are accelerating changes in the financial advice industry

The financial pressures resulting from the pandemic combined with the current climate of tax uncertainty has resulted in accelerated changes. The increased digital world of communication has highlighted the need to stay in touch with clients and be open and adaptable to changing circumstances. For example, wealthy individuals may be looking to find the most tax-efficient method of gifting money to members of their family who need it most, or even consider bringing forward drafting wills, which has been pushed to the front of people’s minds as a result of the pandemic. These kinds of steps require careful planning and thought to ensure that wealth is effectively shared.

Life coach or tax advisor?

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In the past, a tax adviser would have arranged to meet their clients once a year to arrange a catch-up on their tax returns, now the relationship between the two is more open and fluid. Advisors are now changing their focus from recommending focused planning structures to asking more sensitive questions surrounding changes to an individual’s circumstance, for example if there has been a death, marriage, or divorce in the family. This approach can seem more like a life coach than a traditional tax adviser role.

Tax advice is in high demand

As a result of the pandemic, demand for tax support has increased in response to the variety of changes that have affected every aspect of people’s lives. The effects of the pandemic have resulted in many wanting to get their affairs in order, reflecting on their personal circumstances as it has meant life has been put on hold, or has meant a change of career. This has resulted in an increased number of requests to bring forward financial reviews.

Providing the right advice has become more challenging in recent months as tax support and advice is in high demand. The Chancellor’s Budget Statement in March stopped short of introducing the tax hikes that many people expected in response to the financial challenges resulting from the pandemic. Despite this, many experts believe more tax increases are likely in the next year or two.

What are the possible tax changes?

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Office of Tax Simplification (OTS) and All-Party Parliamentary Group (APPG) in its second report on proposed changes to the inheritance tax regime, published last July. The current 40% rate of inheritance tax and the array of associated exemptions are widely perceived as complex and unfair and calls for reform in this area of taxation are strong. The reduction in the rate of inheritance tax is just one of the possible changes. The APPG proposes that this rate will be reduced to 10% on taxable amounts up to £2million, and 20% on the balance of the estate. At the same time, access to reliefs such as business property relief are expected to tighten changing the rules to be more in line with business asset disposal relief. Overall, to help address the sizeable budget deficit, the tax take from these changes is expected to increase significantly.

The proposed changes to lifetime gifts could greatly affect some high-net-worth individuals, causing significant disruption to their financial plans.  In particular, the current exemption for gifts made out of income;such gifts are typically made by high earners to individuals in their family, and as long as the payments are made regularly with good records, they fall outside of the estate for inheritance tax. However, if the proposals to restrict such gifts to either a fixed percentage of income, or a limit of £30,000 per annum go ahead, many more people could be affected by this change, for example, those who might wish to make a one-off lifetime gift to a child for a deposit on a house. Looking at other areas of taxation, there is increased speculation about an increase in the rate of capital gains tax, to align it more closely to that of income tax. Those looking to make significant disposals within the next year or so may need to consider accelerating their plans so that they can benefit from lower tax rates.  Other possible changes could see the reduction in the current CGT annual exemption, which could see an effect on both transfers between husband and wife, and also disposals within discretionary managed portfolios.

How can we help?

With the future tax system surrounded by uncertainty, it is important that wealthy individuals have access to trusted tax advisers. Not only will these individuals help keep financial plans flexible in the short term, they will also be able to advise on mitigating potential increases in tax liability by bringing forward decisions. An adviser’s role is more important now than ever, focusing on what clients and their families want from life and making sure this is clearly understood.

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