I spent an hour or so this morning updating a document we use in the office.  I say a document but actually it’s a spreadsheet.  We use it to do something that not many others financial advisers actually do – to ensure that investments are as tax efficient as possible. Here’s how we do it…

Many of our clients come to us for recommendations on what to do with large amounts of cash. For many we devise and implement an individual savings account (ISA) strategy where the maximum ISA investment is made each year. For the surplus holdings we might recommend a general investment account (GIA). Each year we arrange to transfer money from the GIA account to the ISA account (i.e. move it to an account free of income tax and capital gains tax).  Overtime all the investments will find their way into the tax efficient ISA wrapper.

Although most advisers will do this, they fail to take account of the different rates of tax between different asset classes. For example, income from fixed income funds is taxed at a higher rate than income from equity funds.

Now here is a good point to give you a bit of background on our investment philosophy.  Here are a few of our investment beliefs:

• Risk and return are related
• There is no additional return without additional risk
• Equities will out perform fixed interest over the long run

In our portfolios the role of equities is to deliver long term returns. In contrast the role of fixed income is to reduce portfolio volatility. We do not use high yielding fixed income as it has a higher return. This therefore means that it is higher risk – risk and return are related. Instead we use low yielding fixed income funds that reduce volatility – the less risk you want, the more fixed income you need.

So what is that we do with that spreadsheet? Here’s what…

Not all investments are taxed at the same rate. In fact income from fixed income investments is taxed at a higher rate than income from equity investments.  At Proposito we put all the fixed income funds into the ISA wrapper first. That way the investments that attract the highest rate of income tax are placed into the “tax free” wrapper first.

Our spreadsheet splits our model portfolios between equity and fixed income and assigns different models to the ISA and GIA separately to ensure maximum tax efficiency.  However the overall investment portfolio models of the ISA and GIA combine to give the desired equity and fixed income investment split for the client’s attitude to investment risk.

There are now over 35 financial planning and wealth management firms now using my spreadsheet to deliver tax efficient investments to their clients.  I’m quite chuffed with that.

Huw is a senior partner at Proposito Financial Planning