Maximising after-tax outcomes in goal-based wealth management.
Dealing with client-specific tax issues, including different tax jurisdictions.
Planning on the basis of after-tax outcomes
Tax is a necessary part of goal-based wealth management where satisfaction, or what denotes success or failure, will be judged by spending outcomes. Spending is after inflation but also after tax. So if spending is to frame the conversation and inform the trade-offs that people make, tax is a necessary input. Where the motivation is next-generation capital, or effectively spending by children and grandchildren, tax on inter-generational transfers may be a key input.
Maximising after-tax outcomes has three dimensions, sometimes overlapping:
- Annual ‘housekeeping’ exercises that make use of known information about tax allowances and thresholds
- Decisions triggered by changes in tax legislation including the tax treatment of pensions
- Decisions that involve judgement about uncertain future tax rates and allowances, including possible major changes in tax legislation.
Advice based on fact
Annual tax housekeeping is the low-hanging fruit in efficient management because it is both rational (rules-based) and relatively certain in its effects. But it is also fiddly and labour-intensive and so is often omitted from standardised wealth management services. It is one of the service elements of wealth management that are worth paying for and therefore worth us doing well, as part of genuinely-customised management.
The second is not predictable but may previously have been an input to decisions made subject to the third, as expectations become fact. Examples are the frequent changes in pension legislation, which were partly predictable from a general direction of travel, and partly random. Knowledge about the second can in turn trigger changes to strategies based on judgement about the future tax regime.
Advice based on judgement
The impact of judgement in both areas can be highly significant in terms of its contribution after the event to after-tax outcomes. Given its explanatory power, seeking tax advantage is a source of value worth paying for. Though uncertain, it is also more manageable and predictable than some of the investment management activities that make up much of the cost of competing services such as market timing and stock selection.
Efficient tax management requiring judgement is less about special structures and products (these usually attract both cost and conflicts) and more about optimal decision making within the structures and products you will anyway need to implement goal-based investing:
- The role of trusts in your goal planning
- How best to assign your new savings and existing holdings to different accounts or (in investment jargon) ‘wrappers’ with different tax treatment
- Maximising after-tax returns from the risk-free component of your capital allocation (the choice of hedging asset may vary somewhat subject to tax treatment)
- Where to source your draw from capital at different stages of decumulation, as between taxable accounts, pension funds and ISAs – and perhaps property and business assets
- Minimising the more heavily-taxed income component of draw and optimising the timing of CGT payments
- Estimating the resulting ‘blended’ tax rate (income and CGT) that feeds into the after-tax outcomes in your goal planning
- Minimising IHT, but in the context of your preferences for spending and gifting designed into your goal planning
Multiple tax jurisdiction
We have always worked with families in more than one tax jurisdiction, those with non-UK domicile, with issues specific to US citizenship and with residency outside the UK. Many have offshore trusts and a few have excluded-property trusts. We have helped a number of clients who became non-resident temporarily or permanently, including where they have sought to establish a change of domicile.
If you have cross-border tax issues, do not assume our small size means we have narrow boundaries. Ask us about our capabilities.
When advising clients with multi-jurisdictional tax aspects, we do not claim to have all the answers but we will work closely with existing specialist advisers and, where appropriate, recommend new advisers to ensure a competent and complete team is in place and working well together.
Though our investment approach lends itself to simple implementation using core, low-cost building blocks that are easily accessible, tax treatment may require us to adapt the implementation to platforms and products in foreign jurisdictions, including offshore bonds, QROPS and other pension schemes and using non-UK instruments to replicate exposures. Our involvement on an ongoing basis can also require us to be appointed as a sub-advisor to a local institution.
In the case of Australia we have even adapted our modelling to include an AUD home base, accessing inflation-indexed ‘linkers’ as risk free assets matching AUD spending needs. We expect to adapt to other currencies where there is demand. However, there are situations where we know we cannot continue to act as manager due to securities laws or tax constraints preventing the implementation of our model, including (now) the US.
Multiple (or changing) tax jurisdiction is an area where ignorance or complacency carries risk but recognising the complexity can itself breed anxiety or frustration and it is rewarding to know that our role is valued, as this client has recently acknowledged:
‘The thing that attracted me to Fowler Drew was the clear philosophy, simple to grasp and easy to carry out. Then came our decision to emigrate and the start of a herculean task to move all of our pension and other assets out of the UK so the new spending plan could be managed tax efficiently with the same philosophy. Fowler Drew identified and kept an eye on the required specialist advisers and providers in four different tax and pension regimes. They dealt with problems that come from institutions being taken over or changing their working practices. They adjusted to multiple changes in law and practice along the way. At times I was pulling my hair out, both irritated with the changes and uncertainty and concerned that the outcome would have a huge impact on our future; but through it all, David and Chris have been a professional voice of reason and possibilities, answering my questions, explaining things to me again and again until I thought I had understood and then again when I wasn’t sure.’