So. Suitability reports. Our bread and butter as a business for the last 11 years and for pretty much all of Cathi’s (lengthy) time in financial services.

They’ve always been the time-consuming part of the process that advisers have wanted to get off their plate and onto the plates of someone who actually enjoys doing them. And that’s us; as paraplanners, we have a unique (read: odd) appreciation of suitability reports and using them to convey often complicated matters to the client in terms they understand.

At least, that was always the aim.

Deep down, we’ve always known there was a very large possibility that those reports were flipped through and popped into a drawer to read ‘later’ (at best). That no matter how many pretty colours or nice tables we used, the majority of clients would absorb the information given to them by their adviser, ask their questions face to face, and see the report as a formality to back that up.

And so we had a ponder as to whether there was anything that could be done about that:

  • Did they need to be quite so long??
  • Did they need to be printed? (think of the trees!)
  • Did they really have to be so flat?

The vicious circle of reports is the more you try to explain a financial term, the more words you use, the lengthier the report becomes, the less likely they are to be read.

But what if we could take some of those terms, get rid of all the words, and turn them into videos? Or motion graphics? What if we could make the reports interactive, and visibly ‘pop’ so the client wants to at least have a play around with it, if not absorb every single word?

What if we could use animations to show the impact of the advice and the costs and charges, so they were as clear as clear could be? In fact, what if they got all of that information in an app, to flick through in their own time, maybe while on the tube, in the hair salon or even in bed?!

Well, here you go. That was the philosophy around our reimagined suitability reports. And here is the output.  We’re continuing to develop them, because our innovation never stops. But we’re pretty pleased with what we’ve built so far and hope you and your clients are too.

Check out our Pension Report:

(Click on the three dots in the right hand corner to make the document full screen)

Within the 11th March budget, clarification on top-slicing investment bonds was provided. Naturally, this budget announcement was completely overshadowed by the other more pressing announcements and measures introduced to support the economy.

The top-slicing clarification can, however, have an impact on the potential tax position for a significant number of scenarios, so it is worth having a look at what the planning considerations are following the changes.

Personal Allowance and income over £100,000

When income assessable to income tax exceeds £100,000, the Personal Allowance is removed at a rate of £1 for every £2 of income above this threshold. At and above £125,000 of income, the Personal Allowance is therefore lost entirely.

For someone with £40,000 of taxable income who surrenders an onshore bond with a chargeable gain of £100,000, the Personal Allowance is therefore lost.

In this scenario, before we consider the tax applicable to the bond, the client’s current taxable income of £40,000 will be affected by the loss of Personal Allowance.

They will now pay basic rate tax on the first £37,500 of this income and pay higher rate tax on the remaining £2,500 (as opposed to paying no tax on £12,500 and paying basic rate tax on £27,500 of income).

This has not changed following the budget.

Previous use of Personal Allowance in top-slicing

What has changed is whether the Personal Allowance is used in the top-slicing calculation.

Previously, HMRC was of the view that if the Personal Allowance is lost (as a result of the high bond gain) it cannot be accounted for when working out any top-slicing relief.

If we take the onshore bond gain of £100,000 and assume this occurred over a period of 10 years, we would have a top sliced gain of £10,000.

With a top sliced gain of £10,000 you would have taken the following approach:

  • Personal Allowance is reduced to £0 due to the overall bond gain of £100,000.
  • The higher rate tax bracket, therefore, starts at £37,501 and income of £40,000 is already above this.
  • £9,500 (£500 uses the Personal Savings Allowance) falls within the higher rate bracket.

The tax charge under this calculation would be £18,000. This is based on a slice of £9,500 being taxed at 40% (£3,800) with an onshore credit of 20% applied against the full slice of £10,000 (£2,000). The difference between the two is the relieved liability relief; £1,800. Multiplied by 10 years this results in a total relieved liability of £18,000.

On the whole bond:

  • £99,500 is taxed at 40% = £39,800
  • £500 is taxed at 0% as this uses the Personal Savings Allowance

The bond has already paid tax equivalent to the basic rate, which against a gain of £100,000 would be £20,000. The difference between £39,800 and £20,000 is the total unpaid tax applicable to the bond, £19,800.

This unpaid tax, minus the total relieved liability of £18,000, equals £1,800. This is the total top-slicing relief available in this calculation.

The tax charge of £19,800 minus the relief £1,800 reduces the tax charge to £18,000.

Changes to Personal Allowance use in top-slicing

HMRC was successfully defeated in the Silver v HMRC case which was specifically focused on whether the Personal Allowance was available in the top-slicing calculation.

The outcome of this case was clarified in the March 2020 budget and now represents the approach to take. This involves the Personal Allowance being available in the top slice if the full taxable income figure plus top sliced gain, rather than the outright gain, is within £100,000 (in reality this would be the case in most instances).

So, looking back at our example, the top slice of £10,000 plus taxable income of £40,000 totals £50,000. It’s well within the £100,000 limit so we can use the top slice for the purpose of this calculation. This means we can base the tax at this stage on the higher rate bracket not beginning until £50,001 of income is reached.

  • £500 of the gain again falls within the Personal Savings Allowance.
  • £9,500 now falls within the basic rate band.

The tax applicable to the slice here would be £0 (£500 x 0%) + £1,900 (£9,500 x 20%) for a total of £1,900. As an onshore bond, basic rate has been assumed to have been paid which means a tax credit of £2,000 (the full £10,000 at 20%) applies. This results in an additional liability on the slice of £0. This is the first stage where there is a difference from the prior rules.

Looking at the overall gain, the first £500 again can be used against the Personal Savings Allowance leaving £99,500 assessed to higher rate tax (We are dealing with the overall gain here so there is no Personal Allowance available at this stage).

The tax in this part of the calculation is £39,800 (£99,500 at 40%). After allowing for 20% of the whole gain as a basic rate tax credit, this is reduced to £19,800.

There was no additional liability on the slice to multiply up by 10 segments, and £19,800 represents the top-slicing relief amount (compared to £19,800 minus £18,000 = £1,800 in the previous example).

You, therefore, take the full £19,800 figure (£19,800 minus £0) from the overall tax charge of £19,800 (£99,500 at 40% – basic rate tax already paid) to find the amount of tax due. Under this approach, there is no tax charge.

So the difference before 11th March 2020 and after is that a bond gain potentially charged at £18,000 would now have no tax liability.

A word of warning, however, is that this type of bond surrender will still cause tax implications, with a tax increase on the client’s other taxable income (as the Personal Allowance is still lost following the large gain here). So in reality, you’d need to consider whether it is worth surrendering this bond at this time in light of a higher charge to income tax on their earnings.

Ultimately, however, if you had assessed a client’s chargeable gain position in the last year or two and been put off by the tax charge, it is definitely worth reassessing now as the tax charge could be significantly lower or reduced to zero following the changes.

If the bond were offshore

The process and steps would be virtually identical. As part of the calculation on the top slice, you include a basic rate tax credit (even though no credit exists in reality).

The initial tax charge (before top-slicing) would be £39,800 (£99,500 at 40% with no basic rate tax credit given here) and from this, you take off the top-slicing relief figure of £19,800 (which is generated by the same approach as the onshore bond, using a basic rate tax credit) for a total charge of £20,000. This represents 20% tax on the full gain of £100,000.

Grant Callaghan – Head of Paraplanning
We heard from our Client Relations Manager, Dwight to find out how lockdown has affected the working process at Para-Sols and the opportunity it presented to the business.

‘’COVID-19 has obviously posed challenges to businesses across all sectors and financial services is no different. At Para-Sols and The Verve Group as a whole, we’re fortunate that our typical desk space has the hardware to enable us a simple transition to home working. We already use laptops and internal chat groups as appropriate, so it wasn’t really a struggle to move a large team to work from home. The key though, hasn’t been just to switch to remote working, but also to maintain that team ethos and spirit that our office fosters. We’ve done this through virtual team meetings, quizzes and generally keeping up regular communication with each other. The very nature of outsourced paraplanning means we’re not located with our clients and so our working location is almost irrelevant as the whole team have access to our case submission portal and shared drives – this means for us we’re very much ‘open for business’.

Many of our clients and prospective clients have mentioned how this unique time has prompted them to review their working process, staffing and even premises. I think many firms will come out of this situation in a different shape, probably more agile, tech-heavy and adaptable to huge changes going forward. Industry-wide, I think the rise of digital signatures has been hugely accelerated by COVID-19, as has the use of video meetings for advisers and clients. Although that’s a very positive way to manage the current situation, I think it’s important to retain the human aspect of financial advice and that will be one of the challenges going forward, as will tailoring the use of technology to each specific client to ensure they receive a positive experience.

The businesses within The Verve Group have used lockdown to further develop the range of services on offer and to fast track the future of finance. It’s where we thought we’d be in 2030, but we’re going to be there 10 years early! #Project 2030 is the brainchild of Para-Sols founder Cathi Harrison. Its aim is to look at how we can adapt to meet the future needs of our clients. Several new services are being launched in early June, including:

At Para-Sols, we’ve always been pioneers in tech and when you combine that with the gift of time that has been thrust upon us, we are once again leading the revolution in paraplanning and technology. So, what happens when you combine those two elements, plus you add our innovation into the mix? You get our brand new interactive, digitally delivered Suitability Reports – which are visually interesting and super easy to use. Click here to check out the new reports.

Our new Virtual Paraplanning service offers our clients the option to have one of our paraplanners attend their client meeting virtually, ensuring we can answer technical queries and complete the meeting notes. There’ll be more coming on this soon but in the meantime, you can watch this video for a little more insight.

Our new services are being launched early June and more details will be provided at our virtual launch party, click below to register to attend.’’