A new study forecasts a boom ahead for advisers offering tax-effective investment advice as the number of higher rate taxpayers rises inexorably.

New research from investment provider HSBC Life (UK) predicts rising demand for tax advice from advisers’ clients.

Frozen tax thresholds mean more taxpayers are being pushed into higher rate bands.

The study found that 82% of advisers’ clients are higher rate or additional rate taxpayers but two out of five advisers do not routinely explain the benefits of tax efficiency on investments. 

The research, ‘The Three I’s of Investable Capital, in association with consultancy Technical Connection, found that 50% of surveyed financial advisers’ clients are higher rate taxpayers while nearly a third (32%) are additional rate taxpayers.

The study found that advisers believe clients rate taxation as second only to inflation as the biggest threat to their invested capital and future financial wellbeing.

Some 35% of advisers cited inflation as the biggest threat compared to 27% choosing taxation. Just 19% said volatility and 18% low returns.

However, the research also found that 39% of advisers do not routinely discuss the benefits of tax efficiency in relation to clients' investments.

Only 27% of clients questioned said advisers routinely discussed the tax efficiency of investments. Almost all (98%) advisers questioned said they believed tax efficiency on capital investments was important to clients while just slightly fewer (96%) of clients said the same.

The study says the failure to consider tax implications might “partly explain” why basic tax allowances are not being used in full. Advisers estimate that on average only 52% of clients fully use the ISA allowance and 47% the pension investment allowance. Just one in five (20%) clients fully understand how insurance-based bonds work.

Mark Lambert, head of onshore bond distribution, HSBC Life (UK), said: “The proportion of clients who are additional rate or higher rate taxpayers will inevitably increase as a result of frozen thresholds, allowances, and exemptions and continuing wage inflation. These drivers point to the fact that clients are more likely to want and need advice on tax effective investment.

“This represents an opportunity to help to promote the benefit of tax allowance optimisation through regular tax health checks. Despite high client concern about inflation and interest in tax efficiency, advisers believe a relatively low percentage of clients know about or use key strategies.”

For the study research was conducted among a geographically representative sample of 200 UK advisers representing 200 companies who were interviewed on the phone. The sample was weighted to be representative for assets under management and number of RIs. Consumer research was conducted online with a sample of 1,000 clients with a minimum of £25,000 investable assets who currently have a financial adviser or saw one within the last three years. The sample was weighted to be geographically representative.

• The report can be downloaded here: https://www.life.hsbc.co.uk/three-i-report/