So, campaigning over, coalition formed and four weeks of arguing whether £6 billion or £10 billion worth of cuts now or next year is the right way to deal with a £156 billion deficit, the election delivers a government and its policies that nobody voted for.  Perhaps some of you say, ‘nothing new there’, but the truth is, as the smoke begins to clear and the actual fires become visible, a new financial pinch is beginning as taxes are put up and public spending is cut.

One of the first casualties is the Conservative party’s manifesto commitment to increase the Inheritance Tax (IHT) nil rate band to £1 million.  The nil rate band, or Inheritance Tax free allowance, is £325,000 and will either stay frozen, as per the outgoing government’s plans, or at best may benefit from some annual indexation.

This move restores an amount of certainty to the market.  We know IHT is here to stay and we know at what level it will happen at.  Some financial planners have agreed a ‘wait and see’ approach with clients who would have been released from IHT by a £1 million nil rate band.  The difficulty facing clients in such a position was how long would they have to wait until they knew if the nil rate band was to be raised high enough?  After a short wait, we can now revisit those clients and get on with planning for lessening their IHT liability.

We are all still waiting to see what changes will be made to lifetime taxes.  It’s not likely to be good news and we only have to wait until the next Budget is delivered by chancellor George Osborne on June 22^nd.

Frequent changes to the tax regimes are not welcomed by long-term investors and their advisers.  Advisers will, once again, have to review the provisions that are in place.  So, what strategies are available to advisers upon reviewing their clients’ portfolio options?

The first thing to keep in mind is that in the longer-term, we may find that we just have to get through a difficult, but short, period where taxation rates are unusually high.  I would hope that in a few years time, healthy growth will have returned to the economy and the deficits will be under better control.  The first option therefore, may be to just ride out the storm and keep investments in place and wait until a more favourable environment allows profits to be taken with less penalty.  This will suit many long-term investors who do not rely on encashment of investments to meet income needs or shorter-term objectives.

Whilst the ultimate drawing of profits may be delayed, most investors will want their investment portfolios to be actively managed and for their portfolio asset allocations to be adjusted from time to time.  Fund of Fund portfolios will be very useful where it suits the clients to be ultimately exposed to Capital Gains Tax (CGT) on the realised profits, as they deliver cost-effective active management within a Unit Trust or Open Ended Investment Company (OEIC) wrapper.  Where an Income Tax environment is preferred, a life insurance bond will provide similar shelter.

Investors with funds that are proactively managed, such as the Bluebond AAA Investment System, will now have the forthcoming changes to the CGT to absorb on top of the recent Income Tax changes.  Holders of the classic Trust versions of the plans already benefit from the inherent tax efficiency of the nil-yielding Bluebond AAA Investment System funds of funds.  As the choice between the CGT and Income Tax environment becomes more critical it will also be good to know that Bluebond, offer access to their funds as direct Unit Trust/OEIC/ISA investments and within offshore bond wrappers, for Trust planning.

The most flexible variants of the plan such as the Bluebond AAA Investment System, can also perform a key role in adapting a client’s overall investment strategy to the new tax regimes.  As well as the choice of tax environments identified above, this plan also allows the trustees to determine whether or not the flexible reversions take place.  Thus the independent financial adviser can recommend that more or less (or none) of the client’s income needs are provided for and balance the reversions with drawings (or not) from other sources.  This judgment can of course be made year by year and respond to changing tax regimes and client needs.

In summary, here is our own proposal in readiness for whatever the new coalition government decides:-

1. Now is the time to revisit IHT planning that had previously been on hold
2. Review tax wrappers
3. Make sure your investments have the best income/growth profile to suit you
4. Use active management within a suitable wrapper
5. Maximise flexibility – only choose plans that can adapt to your needs

Please call us on 01582 839280 if you need help or advice or Email us.