At a recent structured products conference I spoke at, John Redwood, the former Conservative Government minister who was speaking about ETFs, expressed surprise at how much attendees talked about tax!
I was not surprised, it makes perfect sense that products designed to meet the needs of private investors should take into account tax. Some individuals prefer to earn income and others are happy to speculate with a view to generating a capital gain.
Of course, the most important point is that to worry about paying tax you have to make a profit or a gain on your investment. Hence, the first step in selecting a structured solution is to understand clients’ investment objectives, market views, cash flow needs, time horizons and attitudes to risk etc. Next to design a solution that can meet those needs and which they understand. Then you can you think about a wrapper that addresses their tax preferences.
Whilst the majority of investors will seek to maximise their returns whilst minimising risks, I am not talking here about schemes that are purely tax driven without any market risk. They have no place on this website.
I am sure that John, an ardent free marketeer, would support the idea that people should be allowed to mitigate their tax bills within the law. For example, taking advantage of individual allowances, tax efficient saving schemes, off-settable losses and differential tax rates that reward risk taking. I would agree with that view and have always sought to give clients a range of solutions that can meet their differing needs.
There are a wide range of standalone solutions in the structured products market place:
- Structured deposits and straightforward notes are generally taxed as income unless they are incorporated into a savings plan or wrapped in a structured fund.
- Certain types of structured fund may participate in the performance of equity markets and pay dividends rather than interest income.
- Warrants, structured funds and certain types of note are generally taxed as capital gains or losses depending on the success of the investment strategy.
Many other investors prefer to hold their structured investments in tax efficient wrappers such as Individual Savings Accounts (ISAs), pensions and insurance bonds. According to structuredretailproducts.com, nearly two-thirds of sales in 2012 can be held in pensions or ISAs. The fact that a lot of UK protected solutions have terms of five years or more is partly to fit into stocks and shares ISAs.
Most brochures will warn investors to obtain their own tax advice and I can only endorse that recommendation.
John Redwood may have missed the point that structured investments incorporate many of the same features and legal forms as traditional deposits, securities and funds. Hence, the same needs arise for investors including tax efficient financial planning.
It was interesting to see that George Osborne cut the maximum amount you can receive full tax relief on from £50,000 t0 £40,000 in the Autumn Statement. Not good new for people who want to invest for the future or the industry as a whole!