WAY's Benson on tax changes

WAY technical manager Mark Benson looks at the possibilities arising from the blue and yellow blend.

So the phony campaign is now over. Whilst the election seemed to take place in a surreal parallel universe, we now have a real, if unexpected, Government and we are beginning to see the truth behind the false debates. A painful fiscal pinch is beginning, as taxes are hiked and public spending cut.

One of the first casualties of the re-emergence of the real world is the Conservative Party’s manifesto commitment to increase the IHT nil rate band to £1m. The Tories had clung on to this pledge despite the best efforts of Ken Clarke, in their own ranks, and the wider weight of common sense, that said the policy was not a good or affordable priority.

David Cameron hinted in the final leader’s debate that the increase would not be top of the agenda in the event of an outright Conservative victory. In any case, events have now moved on and the policy has been kicked firmly into the long grass.

Whilst the position for IHT is much clearer, we have a little longer to wait to know what changes the new government will make to lifetime taxes. We know the news will not be good. The outgoing Labour Government had already brought in a new 50% rate of income tax and we know from the coalition agreement that the new government is to make CGT bite harder upon non-business assets.

Frequent changes to the tax regimes are of course very unwelcome for long-term investors and their advisers. The current flat rate CGT regime only dates back to 2008 and the previous regime only survived about 10 years. Such upheaval becomes a great hindrance for individuals trying to put in place a long-term investment strategy.

The current changes to taxation will of course mean that advisers will have to, once again, review the provisions in place. In the current climate it may be hard to find a safe haven from a demanding Treasury however. So what strategies are available to advisers upon reviewing their clients’ portfolio options?

The first option may be to just ride out the storm, 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 able to be delayed, most investors will want their portfolios to be actively managed and for their portfolio asset allocations to be adjusted from time to time.

It is clearly unhelpful if considerations of the tax chargeable events that would be generated have to interfere with such activity. The answer, of course, is to ensure that such activity takes place within a suitable investment wrapper. Fund of fund portfolios will therefore be very useful where it suits the client to be ultimately exposed to CGT on the realised profits, as they deliver cost effective active management within a Unit Trust or OEIC wrapper.

Where an income tax environment is preferred a life insurance bond will provide similar shelter.

In summary, we present our own manifesto in readiness for whatever the new coalition Government decides:

• Now is the time to revisit IHT planning that was put on hold
• Review tax wrappers but don’t chase the tax tail – it may be better to ride out the storm
• Make sure investments have the best income/growth profile for the client
• Shelter active management within a suitable wrapper
• Maximise flexibility – only choose plans that can adapt to client needs as the winds change.

Welcome back to the all too real world.