Offshore Investment Breaking the Weakest Link

1967: The Graduate - Nichols

Offshore investing can be a very wise strategy for investors, however much caution is needed. The over-arching principle should be simple - placing money offshore means it grows free of tax until it is brought back to the UK or anywhere else - at which point it will be taxed appropriately. In its proper place, offshore investment is little more than delaying tax. In an ideal world (for the investor) you bring funds back to the UK when your rate of tax is more favourable. To my mind there is nothing morally or ethically wrong with this. It is not tax evasion, it is tax delaying - and not in the sense of paying HMRC late, but as appropriate (when the money is in the UK).

So it is disappointing to note that The Times has today reported that various well-known people have been named once again in an offshore scheme (Liberty Tax Strategy) that is so aggressive in its approach to create artificial losses that it potentially could be regarded as tax evasion. This is of course up to HMRC to decide, not The Times. However I do wonder what on earth some advisers tell their clients. I would like to think that everyone has been advised appropriate or suitable investments that they can understand. However it must be particularly important for those in the public eye to avoid any suggestion of improperness when it comes to tax. Certainly irrespective of fame, our clients are not put in a position where they may have to do some serious explaining to the HMRC and possibly the media. Yet this is precisely what journalist, BBC Watchdog and The Weakest Link host Anne Robinson has read today in The Times. She's not alone either - several members of the "boy band" Take That are also caught in the crossfire. There is believed to be around £1.2bn invested in the scheme by around 2,000 investors.

The heart of good investing is making sure that your investments are suitable to your financial plan. It is very hard to believe that the sort of "investing" that I've outlined above is in any way helpful to a good financial plan - and certainly not a great one. Your financial plan should reflect your values and be structured around your requirements. Tax is a part of the investment discussion, but it should never dictate the terms. It would appear that as in the film "The Graduate" a certain Mrs Robinson, journalist and Watchdog consumer champion, might have known better. Our clients won't get exposed to this sort of thing.

Impartial Investment Portfolio Advice

1939: You Can't Cheat An Honest Man

I spent the first half of this week at the annual IFP (Institute of Financial Planners) conference. The IFP are to my mind the leading professional body for proper financial planners. It is a fairly "top drawer" group who share ideas and work with a set of shared values and ethics.

At one point, I was talking with fellow advisers about investments for clients. We are a pretty open and honest bunch, some do the investment themselves, whilst others outsource the service to a Discretionary Fund Manager or DFM. A DFM has the ability to trade and deal without asking permission from the client (other than at the very outset of the relationship). They are effectively a stockbroker. Some are pretty good, but many are pretty hopeless (and believe me, some are really very hopeless). Many advisers have been switching their clients across to DFM services, because they have been concerned that to invest money for clients carries compliance risk and many don't possess the skills or time (or both) to look after portfolios. One of the most significant problems is evaluating performance and getting DFMs to properly outline their understanding of "risk", "long term investing" and "volatility" and keep to the brief outlined for the client.

Several of us agreed that one of the problems with DFMs is that despite the fact that advisers don't manage the portfolio, they still get paid by the the DFM for effectively adding little of value to the client (it is clearly valuable for an adviser to review the performance of the DFM - and ideally establish the parameters). Another problem is that as DFM's focus purely on investing, they tend to trade a lot, creating liability for capital gains and income tax, perhaps without regard for the full picture which is a significant advantage that advisers should have. Indeed due to VAT rules, this sort of service can be even more expensive to the client. Those that I spoke to admitted that they struggle with the ethics of advisers being paid the same amount if they hand off the work to a DFM rather than doing it properly themselves. This is one of those topics that simply doesn't get talked about in clear terms, but it is refreshing to find advisers at the IFP that have high standards.

It would seem that the regulator tends to agree, having announced today that advisers cannot be paid by DFMs (but they can be paid by the client). I can see the logic and wisdom of this, but I'm now also concerned that as a result of this formal decision a couple of things may happen. If advisers don't get paid by a DFM, I imagine that those that have told clients to use a DFM may find excuses to bring the money back under their management and would probably discourage their clients from using a DFM. I have already acknowledged that a DFM may be suitable for some clients, so a carte blanche "I never use DFMs" would seem to my mind to be very unwise and contrary to being impartial. This dilemma could all be avoided with properly agreed fees - something that we have always done with our clients.

Business Owners & Execs - Car Benefit Scheme

1977: The Car - Silverstein

If you are a business owner or executive with a company car and a salary sacrifice scheme, it seems that life may get a little more complicated and probably more expensive. The online accountancy media are suggesting that those with salary sacrifice and company car schemes are going to get more expensive due to a European Court of Justice ruling. This is due to VAT which employees have had to pay on non-cash goods provided by employers in exchange for income, a service, which is VAT liable. This has been the case since January 2012.

The ECJ basically ruled in agreement with HMRC that the salary sacrificed is a supply of services in return for payment and therefore subject to VAT. This careful fine twist in the rules has wider implications for any salary sacrifice scheme. You should certainly take this matter up with your Accountant and I would urge you to read the HMRC guidance which you can find here.

Nobody should be under any illusion that HMRC is a soft touch, the Coalition Government are very clear that all tax must be properly collected and HMRC must deliver results and effective measures to ensure that this happens. Whilst there are advisers and accountants that will always push at the edges of tax avoidance into evasion, you need to be clear that tax evasion can carry serious penalties, including a custodial sentence. Whilst we assist clients reduce tax and plan appropriately to do so, it is important that such actions do not contravene the law or the direction of the law.

Banks Leaving Financial Advice to IFAs

1990: Tie Me Up, Tie Me Down

Banks have been declaring their hand for the new financial world from 1st January. Last week Santander announced that they would only be offering investment advice to those with £25,000 or more and only from the range of products that they produce. In short they sell what they make. I'm always amazed that anyone would actually go to a bank for financial advice, but hopefully from January at least it will be clear how little a part of a proper conversation they are even able to entertain.

This was on the back of Lloyds also announcing that they are scrapping their services to anyone with less than £100,000 - again, why would anyone with £100,000 go to Lloyds for investment advice is beyond me. Barclays had already announced that they will not offer financial advice, except via its wealth management team, who focus on ultra wealthy (and presumably fairly easily pleased). HSBC will scrap their tied advice and provide execution only services (meaning you order what you want and they sort it out), they intend to remain whole of market, though frankly I don't see how this will work in practice. Royal Bank of Scotland has abolished its independent arm (if you could ever find it) and going for a restricted model (limited financial products). Nationwide, one of my favourite Building Societies, is going to give it a go at offering fee based advice. It will be interesting to see how they get on and I imagine that the other Banks will be watching carefully.

So in summary, the new rules about providing advice mean that the vast majority of people living in Britain will not get any form of independent advice. They probably won't get an awful lot of option for restricted advice either. That of course is one way to solve the problem of mis-selling and scandal (reduce the choice) but it doesn't seem terribly well thought through to me. We need a society with better financial education and greater access, not less.