Financial advisers and the ‘wealth tax’ toll
A wealth tax has always been anathema to UK governments. The closest was Labour’s capital transfer tax, which ran from 1974 to 1986. It was basically an inheritance tax that applied in life as well as after death. Vestiges of it remain in the IHT rules but it was not a wealth tax like those they have in Spain, Argentina, Norway, Switzerland and other countries. They charge a percentage of your total assets each year.
Neither council tax nor stamp duty land tax and its Welsh and Scottish equivalents are wealth taxes — the latter are transaction taxes on sales. MPs have to declare ownership of property or land over £100,000 — apart from their home — and of shareholdings over £70,000 but they do not have to give figures on their value.
Nor do they have to declare dividends, unlike the rest of their extra-parliamentary income. So wealth itself — the value of land, property, investments, savings, possessions and so on — remains cloaked in secrecy even from the taxman, at least until death when inheritance tax takes some of it above the nil-rate bands, which from April can total £1m.
In the UK, the only people who pay a wealth tax are the poor. Those who claim means-tested benefits are subject to a hefty tax on their capital (savings, investments, and property, except their home). Anything over £6,000 means a reduction in their benefit of £52 a year per £250 over that limit — a marginal tax rate of 20.8 per cent (half that for pensioners). This tax on capital does not apply to the middle-class means test for child benefit, which is only applied to income.
So well done financial advisers, investment platforms and fund managers. You take a percentage of your clients’ invested assets year after year — a wealth tax if ever there was one. Of course, these taxes are shrouded in secrecy. It has taken a European directive to get even nominal “transparency” through this blanket. Many charges remain hidden either by those who believe they have found ways to sneak them past the rules or by those who are not yet fully complying 21 months after they should have been.
The damaging effects of the wealth tax they do admit to are never explained. The miracle of compound interest is often used to explain the advantage of investing over the long term. A 6 per cent return a year transforms into doubling your money over 12 years or trebling it over 19.
But the percentage fees that are taken year after year from clients are never referred to as negative compound interest — which is what they are — and they destroy more value the longer they go on.
Taking a 2 per cent charge will slash the rate at which your money grows and can mean your adviser gets most of that growth. For example, on £10,000 invested an annual return of 5 per cent over 25 years means your investment makes £23,864. But with a modest tax of 2 per cent, that growth is shared £10,938 to you and £12,926 to your adviser and others. They take 54 per cent of your gains. This excellent website does the maths: larrybates.ca/t-rex-score. Make a strong cup of tea, sit down and put your own figures in.
That is why a wealth tax on their clients is advisers’ preferred way to charge — and a model always used by fund managers. The FCA says advisers who transfer people out of defined benefit or “final salary” pensions charge 2-3 per cent of the total realised (though this will be banned possibly as soon as the end of next year) and then put the money into their own investments so they can tax the growth at close to 2 per cent as well. On investments, most financial advisers charge a percentage of 0.5 per cent to 2 per cent of the assets they are advising on. The platforms they use and the funds they are invested in also take a percentage levy.
Although very big assets might take more work than very small ones, the work is not in direct proportion to the size of the fund. Advisers often justify this wealth tax by saying that because the wealthier clients pay more it can afford to advise those with less wealth. In other words there is a cross subsidy between rich and less rich clients. Among all those who have used this excuse to me, not a single one explains that cross subsidy to its clients, never mind allows them to opt in or out of it. I doubt that behaviour falls within Financial Conduct Authority rules demanding financial communications are fair, clear and not misleading.
Before they twitterstorm me, I must add that some advisers do not charge this wealth tax. They charge fees per hour or per task. But they are a minority. At least I think they are. Trying to find the charges and costs on most advisers’ websites is like trying to find an intact 18th century clay pipe on the Thames foreshore.
So full marks to the industry for showing the government that a wealth tax is possible and would be widely accepted among the better off. Now give it up, charge open and straightforward fees, and leave the tax ground for the Treasury.
Paul Lewis presents ‘Money Box’ on BBC Radio 4, on air just after 12 noon on Saturdays, and has been a freelance financial journalist since 1987. Twitter: @paullewismoney