Dr. Benson’s Casebook

“I thought ISAs were tax free?”

This is the first in a series of blogs from “Dr. Benson’s Casebook” .
Our Technical Manager, Mark Benson, delves into his IHT surgery files for topical cases and selects those likely to be of most interest to IFAs (and their clients)..

In each case he gives his opinion and demonstrates the methods he would use to solve the issues raised.

Case Study:

Graham is 70 and a divorcee.  He has two adult daughters from his former marriage who will eventually inherit his wealth.  His assets are as follows:

Assests:
House (mortgage free): £300,000
Bank accounts: £15,000
Cash ISAs: £20,000
Stocks & Shares ISAs: £70,000
Value as at May 2011: £405,000

He has met with his IFA who suggests that he should undertake some planning to reduce his potential Inheritance Tax (IHT) bill of £32,000.  Graham is perplexed, since he is aware that he can leave £325,000 in his will free of IHT and thought that his taxable estate would fall within that nil rate band?

He consults Dr. Benson at his IHT surgery, who says:  Graham’s IFA is quite correct in his assessment of the potential IHT liability.  It turns out that Graham held the common misperception that his ISA investments really were tax free, and so did not count them when calculating his estate.  Graham can be easily excused this confusion. For example, a visit to a well known consumer money website garners the following explain of an ISA:   “it’s simply a tax free wrapper into which you can place either cash or shares.”

Unfortunately the site in question, along with many others who also ought to know better, has incorrectly suggested that ISAs are completely tax free and overlooked the fact that the tax advantages only extend to Income Tax (partially) and Capital Gains Tax (CGT), but not to IHT. Graham’s IFA has therefore correctly calculated the potential IHT liability.

The good news for Graham is that I can reassure him that he has been well advised to make use of his ISA allowances up to this point. The savings in Income Tax on his Cash ISAs and CGT on his Stocks and Shares ISAs over the years are real and valuable. However the situation now is that, as he enters the later stage of his life, the future savings in these two taxes are likely to be less valuable than the potential savings if the IHT issues were to be addressed. Let’s see why:

If Graham were to transfer most of his ISA funds into a flexible reversionary interest trust he could remove the current IHT liability once the transfer falls out of account after 7 years, whilst retaining the potential to benefit from the capital if needed in the future. This would mean forgoing the Income Tax and CGT benefits of the ISA wrappers. Could the lost benefits amount to more than the potential IHT saving of £32,000?

Let’s first consider his cash ISAs. The potential IHT on the £20,000 balance is £8,000. Graham has kept a careful eye on the rates on offer and has transferred his holding into the current “best buy” account paying 3.35% p.a. (source Moneyfacts.co.uk). As a basic rate taxpayer he therefore saves £134 p.a. in Income Tax on the interest received. That sounds great, until I point out that it will take him almost 60 years to save enough Income Tax to offset the IHT bill!

How about the Stocks and Shares ISAs? Suppose that Graham lives another 10 years to age 80 and that he enjoys an average capital growth of 5% p.a. over that time. His holdings would grow to just over £114,000 which would attract an IHT charge of around £45,000 (ignoring growth in the nil rate band) if held in his estate at death. If the assets had been transferred into the trust, and the trustees passed on the units to his daughters after his death, their CGT bill would be less than £13,000 (at the very worst, but probably much less with some simple tax planning) – below 1/3 of the potential IHT liability.

In conclusion, although Graham’s ISAs have been a valuable and sensible choice over previous years, now may be the time to think about saving IHT as a priority over Income Tax and CGT.

Mark Benson, TEP CertPFS,
Technical Manager, WAY Investment Services Limited
13th June 2011
www.waygroup.co.uk

Posted on 13th June, 2011 | Tags: Dr Benson's Casebook |
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The Last Crusade

– search for the investment strategy Holy Grail

I am one of those industry veterans who, whilst still having some way to go before retirement age, can boast 30+ years of experience in investment management.  The earliest of those years was spent managing discretionary portfolios totalling some £40m of private client moneys (I am talking the 1970/80s here!).  Although slightly more removed from the coal face these days my interest in the industry search for the Holy Grail of investment strategy remains just as strong as ever.

 The ideal combination of low costs, low charges, competitive performance and minimal drawdowns (reductions in value) has eluded academics and practitioners alike ever since stockmarkets evolved almost two centuries ago.  Index trackers and absolute/hedge funds have been the most recent attempts but both have failed miserably to deliver anything remotely resembling consistent upward-only performance.

After all this time it is pretty clear that the emotional drivers behind efficient stockmarkets, the urge to speculate in shares, means that there isn’t and never will be a formula for achieving consistent stockmarket returns.  However, my study of markets over the last 120 years and more does indicate that markets undoubtedly move in both short and long term trends, normally linked to economic and political factors at play in the global commercial world.  Trend following (and trading strategies through the use of moving averages) has also, therefore, been a feature of investment management for a long time.

It is therefore with great pleasure and amusement that I have discovered that a combination of trend-following and trading triggers, based on moving averages, has now been demonstrated to be the most reliable means of managing a portfolio over the medium to log term – BUT ONLY if all subjective and emotional human input is removed from the management equation!  Extensive research from professors at the City-based Cass Business School has indicated that investment performance is enhanced and volatility reduced by adopting a purely mechanical but entirely logical process to manage investment portfolios.

I am also delighted to add that the practical application of this research has been brought to WAY Fund Managers courtesy of Hasley Investment Managers (and their captive professors from the business school) and is now available to investors via the WAY Hasley Global Momentum Fund.  This fund invests in 24 mature stockmarkets via 14 low-cost ETFs, with each ETF being invested, or not, each month depending on a moving average trigger.  The process means that the fund can be up to a month or more late in joining any particular trend, depending on precisely when it started, but that it tends to fully participate in all long term up-trends and totally avoid all long-term down-trends.  The (back-tested) result shows impressive performance and great risk-aversion.  I can commend it to you as a major core holding for virtually any long term portfolio.

Associated Links:

Website: WAY Hasley Global Momentum Fund
Website: Cass Business School (City University London)
Website: Hasley Investment Management LLP

Paul Wilcox
Chairman & Technical Director, WAY Group
11th May 2011
www.waygroup.co.uk

Posted on 11th May, 2011 | Tags: Cass Business School, ETFs, Exchange Traded Funds, WAY Hasley Global Momentum Fund |
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New fund launch: the WAY Hasley Global Momentum Fund

Today we launched the WAY Hasley Global Momentum Fund, ushering in a new era in fund management dynamics. The WAY Hasley Global Momentum Fund is a global momentum fund investing in developed markets primarily through the medium of Exchange Traded Funds (ETFs). A proprietary trading system based on specific moving averages is employed and the process is mechanical with no judgemental overlay…

1. New fund based on a trend-following momentum process
2. Low management fees through use of Exchange Traded Funds (“ETFs”) and cash
3. Investment decisions driven by academically researched rules
4. Impressive back-tested results

WAY Group and Hasley Investment Management have joined forces with leading academics from London’s prestigious Cass Business School to design and launch the new trend-following Global Momentum Fund on 28th February 2011.

The Fund – which is likely to pave the way for a new type of investment methodology in the UK retail market – is designed to offer exposure to 24 developed equity markets via low-cost Exchange Traded Funds (ETFs).

The Momentum Fund will compare indices with their moving averages on a monthly basis to determine whether investors should stay in a rising market – or move into cash to avoid market falls.

The Fund will invest in equally weighted baskets of developed world equities, but will move into cash if sell signals flash red.

“When an index goes through the moving average at the bottom, it comes out of equities, and when it’s above, it stays in,” said Professor Andrew Clare of Cass, originator of the ‘rules-based approach’, along with colleague Professor Steve Thomas.

Back-testing for the Fund has determined that it should be able to match or beat a long-term buy-and-hold strategy, yet with two-thirds of the volatility.

“In a test from 2001 to 2010, the strategy achieved a compound annual return of 6.6 per cent with 9.6 per cent annualised volatility, compared with a 1.9 per cent compound annual return with 16.6 per cent volatility from the MSCI World index,” added Professor Clare.

Investors have long struggled to find funds which consistently beat the index and this has led many toward buy-and hold (or passive) funds which can be bought at a more modest price. The difficulty here is that such funds will follow markets down as well as up and this fund will look to perceptively reduce this negative trait.

Eddie O’ Gorman, of The WAY Group, said that the Fund is the first step in a series of launches likely to alter the UK investment landscape.

“There are some outstanding creative investment opportunities out there, and with this powerhouse of academic research as a dynamic driving force behind WAY/Hasley investment protocols, we believe investors will genuinely be provided with something fresh and beneficial to begin 2011.”

References:
Data & Statistics: WAY Group Limited, Hasley Investment Management LLP

Footnote:

1. Professor Steve Thomas is a graduate of LSE and Southampton Universities in Economics and Econometrics and has published extensively in international research journals for over 25 years. He was recently ranked 11th in Europe for finance research since 1990. He has been a finance professor at the University of Wales and Southampton University prior to joining Cass, and a Visiting Professor at Queens University, Canada, and the ICMA Centre, Reading University, UK. In 1990 he was the Houblon-Norman Fellow at the Bank of England. For over 20 years he has been editor of Interactive Data’s (formerly FT) credit rating publications; he has extensive experience in professional education and training in all areas of economics and finance for banks and related institutions and is an examiner for the Investment Management Certificate of UK SIP.
2. Professor Andrew Clare is the Professor of Asset Management at Cass Business School and the Associate Dean responsible for Cass’s MSc programme, which is the largest in Europe. He is also the co-founder and chairman of Fathom Consulting, a leading London-based economic and financial market consultancy. He was a Senior Research Manager in the Monetary Analysis wing of the Bank of England which supported the work of the Monetary Policy Committee. While at the Bank Andrew was responsible for equity market and derivatives research. Andrew also spent three years working as the Financial Economist for Legal and General Investment Management (LGIM), where he was responsible for the group’s investment process and where he developed LGIM’s initial Liability Driven Investment offering. He has published extensively in both academic and practitioner journals on a wide range of economic and financial market issues. In a recent survey Andrew was ranked as the world’s ninth most prolific finance author of the past fifty years. Andrew has also recently been appointed to the investment committee of the GEC Marconi pension plan; this committee oversees the investments and investment strategy of this £3.2bn scheme.
3. Located in the heart of London’s financial district, Cass Business School is a leading provider of business and management education. Its MBA is recognised globally as a market leader, and Cass has the widest portfolio of Specialist Masters programmes (MSc) in Europe; its Undergraduate School is one of the best in the UK. It is ranked in the UK’s top 10 business and management research schools.

Associated Links:

Website: WAY Hasley Global Momentum Fund

Website: Cass Business School (City University London)

Website: Hasley Investment Management LLP

Paul Wilcox,
Chairman & Technical Director, WAY Group
28th February 2011
www.waygroup.co.uk

Posted on 28th February, 2011 | Tags: ETFs, Exchange Traded Funds, WAY Hasley Global Momentum Fund |
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WAY IFA seminars to focus on IHT

The WAY Group is hosting a series of seminars designed to help IFAs get to grips with new legislation on tax planning.

The group will visit eight regions across the UK for the inheritance tax multimedia seminars in November.

A senior team from WAY will talk about current legislation, the frozen nil-rate band, disclosure of tax avoidance schemes regime and the direct impact on advisers and their clients.

The seminars will also aim to help IFA develop the service they offer clients.

Eddie O’Gorman, Sales & Marketing Director of WAY, said: “Many IFAs are unaware there are a number of innovative investment strategies available to them.

“It is vital to use the correct trust and not simply for estate planning and family wealth preservation. In these days of punitive taxation, where the government is looking to maximise revenue from all areas, the use of tax-efficient solutions is likely to be more in demand than ever.

“IHT and wider estate planning and the myriad of extended family taxation issues that accompany this area of overall financial planning can be a minefield. WAY is a known specialist and pioneer in this area and we will be bringing our expertise to regional financial advisers to enable them to draw on our extensive experience and successes in high-level estate planning.”

Visitors will also be provided with case studies and marketing material during the eight-day whistle-stop tour, which opens in Ashford, Kent, on 5 November and ends three weeks later in Truro, Cornwall, on 25 November.

Log on to: IFA Seminars – Autumn 2010 for more information.

Paul Wilcox,
Chairman & Technical Director, WAY Group
5th November 2010

Posted on 5th November, 2010 | Tags: IHT Mitigation |
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Homer says ‘Doh’ to DOTAS

The recent announcement that IHT mitigation via transfers into trust is likely, in future, to be included in the DOTAS (Disclosure of Tax Avoidance Schemes) regime was received with some trepidation by advisers accustomed to assisting their clients with IHT mitigation.  In reality this proposal by the Treasury and HMRC is nothing more than was expected following the blocking in the Finance Act 2010 of two specific trust schemes which dramatically (and arguably artificially) reduced the value of assets gifted into trust.

Now that the coalition has nailed its IHT colours to the mast by freezing the Nil Rate Band (NRB) for 5 years it is backing this, much harsher than heralded, approach with supporting legislation to plug as many leaks as possible.  The consultation document introducing the DOTAS requirement does not seem unreasonable in the circumstances and certainly does not impact on most conventional IHT mitigation work using the various trust schemes which are widely available.  What is being suggested as far as disclosure is concerned?

The new rules will not require any existing schemes well known to HMRC (such as flexible and discounted gift schemes) to register because they are being ‘grandfathered’ in to acceptability.  Looking forward it will only be new trust schemes which (a) involve chargeable transfers beyond the donor’s current allowances, including any unused NRB – in other words where property becomes ‘relevant property’ – AND, (b) which involve an ‘advantage’ in relation to the IHT entry charge – an advantage being defined as the avoidance, reduction or deferral of a charge – which have to be registered.

This avoids any requirement to disclose straightforward situations where an individual simply transfers property into trust and relief or exemption is available in the same way it would have been had the property been gifted directly to another individual.  This is generally the case with most of the current crop of trust-based mitigation arrangements.  The proposals are only at the consultation phase so it is too early to be unequivocal about the requirements for plans launched in the future.  However the grandfathering facility will ensure that all existing plans of which HMRC are aware – and future plans which adopt the same principles as existing plans – will be quite safe.  In fact this is the nearest we have ever come to having a blanket approval from HMRC of all existing plans.

What does this mean for tax planners and their clients going forwards?  Well we should start by considering the position of taxpayers who have been relying on either the indexation of the NRB or, more recently, the Tory commitment to a transferrable £1m NRB, to lift them out of potential liability.  I think this is bad news for such optimists.  It is clear that a Lib-Con coalition government has a rather less generous approach to inherited wealth than that promised by the Tories.  Freezing the NRB for 5 years when the knock-on impact of ‘quantitative easing’ (printing money) is likely to be rampant inflation down the line is really quite serious.  I think most readers will agree that inflation is already rearing its ugly head no matter what interest rates are doing.  Looking further ahead there has been plenty of speculation that the coalition might well continue through until another term of government – especially if next year’s referendum delivers backing for the Alternative Vote electoral model.  This will mean a continuation of a cautious approach to raising IHT allowances.

The following chart shows the value of the NRB compared with assets starting at the same value rising with inflation.

This means that taxpayers currently on the cusp of a potential IHT liability will be severely disadvantaged by the freezing of the NRB – assuming inflation of 4% over the next 2 years followed by 8% for 3 years.  Readers may doubt such a scenario but not if they are German historians!  In the situation shown, a potential liability of nil at the beginning would become a liability of some 40% of £117,814 (tax of £47k+) after 5 years, simply resulting from inflation.

This brings me on to a favourite phrase of my IHT planning friend, Nick Chadwick, who constantly reminds taxpayers to ‘hope for the best but plan for the worst’.  This has served him well over several decades of capital tax planning and, I suspect, he will be proven right yet again!

So the message here is that all those advisers and their clients who, since 2008 when they were given false hope by the posturing of Alistair Darling and George Osborne, have put off their IHT mitigation planning, have no time to lose.  Since many of these people are relying on multiple use of the NRB, every day is important in clocking up those 7 year inter vivos periods.  Remember – hope for the best but plan for the worst – start your IHT mitigation planning today.

Paul Wilcox,
Chairman & Technical Director, WAY Group
9th August 2010

Posted on 9th August, 2010 | Tags: HMRC, IHT Mitigation, Nil Rate Band |
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As the smoke clears we begin to see the flames

So the phony campaign is now over. After four weeks of argument as to whether £6bn or £10bn of cuts now or next year would be the right way to deal with a £163bn deficit, the election delivers a government and a collection of policies that nobody voted for. 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. Mr 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. The nil rate band is £325,000 and we will either stay frozen as per the outgoing government’s plans or at best might enjoy some annual indexation.

The killing off of this policy is in many ways a good thing for financial planners. The move restores a good amount of certainty to the market: We know IHT is here to stay and we know at what level it bites. Some planners will have agreed a “wait and see” approach with clients who would be taken out of the IHT net by a £1m nil rate band. The difficulty facing clients in such a position was how long would they have to wait until they knew that the nil rate band was to be raised high enough? Well, we haven’t had to wait long and now we have seen. It is therefore time to revisit those clients and to get on with the business of planning for IHT mitigation.

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, and we also know that we only have to wait until the next Budget is delivered by new Chancellor Osborne on 22nd June. 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. At present details are scant regarding the level of the rate, the exemptions and the date of introduction, so we will have to hold our breath for a few weeks more until Budget 2010.2.

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 (taper relief) regime only survived about 10 years. Such upheaval becomes a great hindrance for individuals who are 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 thing to keep in mind is that whilst there may be choppy waters ahead, 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. One 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 may therefore 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.

Investors with funds in trust, such as WAY Inheritor Plan holders, will now have the forthcoming changes to the CGT regime to absorb on top of the recent Income Tax changes. Holders of the classic Unit Trust versions of the plans already benefit from the inherent tax efficiency of the nil-yielding WAY Global Portfolio funds of funds. As the choice between the CGT and Income Tax environment becomes more critical it will also be good to know that WAY, uniquely, offer access to their funds within the Inheritor Plans both as direct Unit Trust/OEIC investments and within offshore bond wrappers.

The most flexible variants of the plan such as The WAY Flexible Inheritor Plan, The WAY Gifts from Income Inheritor Plan and the WAY Duo Inheritor Plan 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, these plans also allow the trustees to determine whether or not the flexible reversions take place. Thus the adviser can recommend that more or less (or none) of the client’s income needs are provided for by the Inheritor Plan and balance the reversions with drawings (or not) from other sources. This judgement can of course be made year by year and respond to changing tax regimes and client needs – an option that is not available where a typical discounted gift scheme is used.

In summary then we can present our manifesto for a new government:

• 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!

Yours sincerely,
Mark Benson TEP CertPFS
Technical Manager, WAY Investment Services Limited
28th May 2010.

References:
1. Preliminary Budget Report, Data & Statistics – ‘Budget 2010, UK Stationery Office, HC 451, 24th March 2010′
2. Labour, Conservative & Liberal Democrat pre-Election Manifestos – May 2010

Posted on 28th May, 2010 | Tags: Coalition Government, IHT Mitigation |
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Don’t sit on the fence – you’ll only get splinters!

With at least one budget and at least one election in prospect for 2010, WAY Investment Services Ltd’s Technical Manager Mark Benson says that there is no time to delay before putting in place IHT mitigation plans for your clients. Given the average gestation period of an IHT case from agreement to settlement and with the (first) budget possibly a month away, the time to start is really today.

A recent IFA enquiry caused me to open the file of a WAY Inheritor Plan settled in February 2004 with an investment of £1,100,000. A number of thoughts sprung to mind such as how growth of over £300,000 in the investment value since then is safely out of the estate of the settlor and thus not subject to IHT on their death, and how in a year’s time the whole trust fund should also fall out of the estate at the end of the 7 year inter-vivos period. The overriding thought that came to mind however was “£1.1m transferred into a flexible trust – those were the days!” Whilst cases of such a size are unfortunately rather rare, it is interesting to reflect on how easily planning could be put in place for such amounts prior to the surprise change to the IHT rules in the 2006 Budget, which shut the door on PET based transfers to discretionary or interest in possession settlements. Nowadays unfortunately our settlor could not put much more than the amount of growth they have enjoyed into trust without breaching the nil rate band and generating a lifetime IHT charge of 20%.

There is a cautionary tale here as 2010 promises to be something of a white knuckle ride for tax planning as the political parties try to balance the challenge of dealing with the financial crisis with the desire to be generous in their manifesto promises ahead of the election. What is certain is that we must have one budget and one election this year. However, whilst May 6th remains a solid favourite for the date of the election – in particular since local elections are already scheduled for that day and cash-strapped local authorities could do without paying for two polls within a few weeks – the odds on the Conservatives as favourites to win that election have lengthened somewhat as the opinion polling shows a narrowing of their lead. With the likelihood of a change of government and the possibility of a hung parliament we cannot discount the possibility of at least one more budget and perhaps one more election this year.

When considering the dismal state of the nation’s finances and the unconvincing emergence from recession, it would seem that there is one thing we can be certain about: The forthcoming budget(s) will make the tax code more hostile to our clients’ income and capital. It is possible that the availability of trust based IHT planning might be attacked itself, akin to the changes introduced in 2006. Moreover there is also the strong possibility that an unfavourable change to the rate of income tax, CGT or IHT would dilute the savings on offer. Some may argue that the Conservatives have pledged to increase the IHT nil rate band to £1m in the first term of a prospective government, however we feel that given the fiscal challenges that lie ahead this might be a policy that remains an aspiration only. Any prospect of a first term introduction surely lies nearer the last year of the parliament.

The prospect for the next few years is that IHT will remain a challenge to succession planning, and if another aggressive attack on the use of trusts is made we might in time look back on the present as another golden opportunity that has passed. Where clients are hesitant to put plans in place due to the uncertain future, their minds can be put at ease by the recommendation of flexible arrangements such as the WAY Inheritor Plans. Our plans can adapt to the client’s changing circumstances by granting flexible powers to the trustees and also to changes to the rates of lifetime taxes by (uniquely in the market) offering access to collective investments and offshore bond wrappers. Furthermore, since clients are limited to investments within the nil rate band it is necessary to start at a younger age and (hopefully) make repeated use of the nil rate band over the years to come.

At some point in 2010 a government will face up to the reality of our financial crisis and present the bill for the remedy to taxpayers.  Those still sitting on the fence at that time will suddenly feel the splinters!

Mark Benson, TEP CertPFS,
Technichal Manager, WAY Investment Services Limited.
19th February 2010.

Posted on 19th February, 2010 | Tags: IHT Mitigation |
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Plan for the worst!

Hope for the best but plan for the worst! Most folk like just enough uncertainty to keep life interesting but not so much as to make them over-anxious. Unfortunately, the current environment puts many people in the second camp.

We are currently facing a ‘flu pandemic and whilst most of us logically know that the chances of it affecting us very badly are relatively slim, we still hate the suspense of waiting our turn at the snuffles. This feeling is exacerbated by the Press, especially when they splash all over the newspapers that yet another apparently healthy individual has (sadly) died from swine ‘flu.

In the wider world the economic and stockmarket uncertainty is also corrosive. Unemployment is rising fast and has a long way to go yet, public sector, corporate and private debt levels are testing and house repossessions and bankruptcies are likely to continue heading northwards. A prime example is the news emanating from Lloyds TSB, which is releasing all its bad employment news incrementally (hoping we won’t notice the big picture). Its recent announcement, which takes target group redundancies above the 8,000 mark, is unlikely to be its last.

And again, the Daily Mail recently reported that senior Tories are now privately admitting that the aspiration to raise the inheritance tax threshold to £1 million and scrap stamp duty for first-time buyers on homes worth up to £250,000 may be delayed because of the recession. One could say that Ken Clarke had already let that particular cat out of the bag in March but it was vehemently denied by the Cameron camp at the time. Personally, I am old enough to know that very few new governments fulfil their manifesto promises made whilst in opposition – and quite understandably so, since they construct their manifestos on grand assumptions which are often far from the subsequently discovered truth (once they actually see the books)!

This leaves investors very poorly served, especially those more elderly and wealthy individuals who should be tackling their Inheritance Tax (IHT) situation sooner rather than later. As one of my oldest and longest-standing friends likes to say: “Hope for the best but plan for the worst.” This is what I would recommend to all those taxpayers who are worrying about whether they should take action to avoid or reduce IHT.

Yes, you should take action. Take all the various steps you need to reduce your potential tax, including getting the 7 year clock ticking now and/or lending financial assets to specialist trusts at currently depressed values. If it subsequently transpires that the planning is not needed then any carefully considered planning can be effectively unwound. Using the right vehicles will incur little extra costs beyond the standard costs associated with establishing any other kind of investment strategy. This warning may sound alarmist but the uncertainty over IHT will be with us for at least another year – until the next General Election – and even then the news is likely to be negative for many years to come. And especially so at a time when there will have to be massive cuts in public services and across the board tax increases to re-balance the nation’s books.

The bigger uncertainty at the moment for most people is the state of the UK economy. Recent stockmarket rises would seem to imply that the recession is all but a thing of the past. And yet many serious pundits are warning of much worse to come. Logic does appear to suggest that the combination of sky-high debt levels across the public, corporate and personal sectors and the delayed effects of the economic slump have not fully worked through the system. With banks still re-building their balance sheets (and likely to continue to do so for some time), lending is not going to improve any time soon. Whilst many individuals and companies have been able to manage their deficits over the last year one can imagine that a continuation of the current credit and earnings drought will eventually take its toll.

My own view is that this cycle will, just as with every previous cycle, pass and we will see recovery. The uncertainty for everyone is when that is likely to happen. With the banks apparently terrified to lend to property buyers, entrepreneurs or even established companies; with southern and eastern Europe all on the verge of bankruptcy; with UK unemployment likely to sail through the 3 million mark leading to more distressed debt and property repossessions; with most stockmarket companies likely to slash dividend rates over the coming months and with the threat of a return of inflation just around the corner, the uncertainty will continue until at least the autumn and probably a great deal longer.

It seems appropriate to end by reminding you again of my friend’s apt catchphrase: “Hope for the best but plan for the worst!” And to reiterate what I’ve already said elsewhere, that this is what I would recommend to all those taxpayers who are worrying about whether they should take action to avoid or reduce IHT. In fact, I would only add one rider to all of the above: “- and do it now!”

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 28th August, 2009 | Tags: Financial Planning |
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