The following guest article examines tax reporting tasks for wealth advisors and the role that technology can play.

Wealth managers have a mass of reporting tasks and the burdens show few signs of declining. Tax and other considerations are always present. What can technology do to ease the strain so that firms can focus on looking after clients, recruit new ones, and find sources of revenue? 

To address these issues is Michael Edwards, managing direct of FSL, which provides specialist investment tax solutions for the wealth management industry (more on Michael below). The editors are pleased to share these insights. The usual editorial disclaimers apply to the opinions of guest writers. To jump into the debate, email tom.burroughes@wealthbriefing.com

Increased tax reporting demands facing wealth managers
Providing accurate and efficient tax reporting is nothing new for wealth managers. But as firms immersed themselves in the busy tax season, extra complexities are bound to increase the burden this year. Furthermore, not all advisors will necessarily be aware of how new requirements will impact their service offering.

The two main changes are the reduction of capital gains tax (CGT) allowance (from £12,300 ($15,629)  to £6,000), meaning that an estimated quarter of a million extra people may be charged CGT next year. This is coupled with a change to how excluded indexed securities must be reported on self-assessments. For the latter, the new rules came into effect so quickly that many software providers haven’t yet been able to update their functionality ready for the preparation of 2022/23 returns. 

Changes to reporting on excluded indexed securities 
On 22 March 2023, HMRC published Agent Update 106 for agents such as accountants who act on behalf of taxpayers. It stated that SA108, the individual self-assessment return form for capital gains, would be amended with a new box for gains arising on the disposal of excluded indexed securities. This update was quietly buried under the section regarding Qualifying Asset Holding Companies (QAHCs), even though it pertains to all such gains, whether they are from a QAHC or not. 

An excluded indexed security is a type of product where the amount payable on redemption depends upon the change in value of a chargeable asset or assets, or in an index of the value of a chargeable asset or assets. The retail prices index or a similar index is not an index for the purpose of classifying an excluded indexed security, but an index of the FTSE 100 would be an index for this purpose.

Regarding the reporting changes, crucially, there is no additional tax revenue at stake. It is not a new form of asset that must now be taxed; it is an existing form of asset that has never needed to be classified separately. Previously, gains on excluded indexed securities were usually included in the total gains on securities. And this is where confusion could arise as they will still be included in those total gains.

HMRC has not been particularly forthcoming on why self-assessments are now essentially doubling up on reporting these gains. Though one thing is clear, in spite of only issuing the new information in March, the change must be reflected in the 2022/23 returns. Until now, excluded indexed securities were included in the much broader category of corporate bonds, and a lot of CGT software hasn’t yet caught up by classifying these securities separately. Firstly, you need to be aware of the requirement. Then, either use software with the new functionality or factor in the extra workload required to reach out to the issuer for the correct classifications.
 
Optimising CGT outcomes 
Halving the annual CGT allowance could mean that wealth managers will have to handle reporting for a broader audience. It also gives them far less room for manoeuvre when deciding what to sell and how to maximise losses so that clients can stay within the allowance. Having a software with What If functionality will help to provide clear implications of the potential consequences should they wish to raise certain proceeds or sell specific assets.

In order to optimise their decision-making fully, they should also consider scenarios such as future corporate actions; for example, if they decide to sell a bond that’s been redeeming it could cause them to exceed the CGT allowance. Plus, having access to accurate niche data such as ERI and offshore reporting funds could determine whether selling out of an offshore fund could create an income tax or CGT liability. As a result, it’s essential to have a really in-depth view of legislations and classifications to present the most tax-efficient investment outcomes. 

These changes are happening during a period of rapid transformation for the wealth management industry, a time when adding value to clients is more important than ever. While the requirements might complicate tasks in the short-term, they also allow firms to stand out and strengthen their connection with customers by being as accurate and efficient as possible. That means giving staff the support they need to provide first-rate tax reporting and investing in solutions that enhance what they offer to provide a better experience all round.

About the author

Michael Edwards is the managing director of FSL, which provides specialist investment tax solutions for the wealth management industry. Michael’s technology career began in 2004, working with the European multinational Atos Origin, providing first-line IT support for the Metropolitan Police Service (MPS) as a service desk analyst. 

He then moved to the global technology company Unisys where he continued to support MPS in partnership with Capgemini and BT, managing IT engineering teams and technology rollouts across London. FSL is part of Industrial Thought Ltd, the parent company for a group of companies shaping the future of financial technology and data products.