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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Inheritance Tax (IHT) – Budget 2011 roundup

Inheritance Tax (IHT) – Budget 2011 roundup

1. Charity donations encouraged
2. No changes to basic rules
3. No review of IHT legislation announced

 

As far as IHT and estate planning are concerned, this was a fairly uneventful Budget.  The only real point of note is the inclusion of a tax rate reduction for charity donations.  The basic rules remain unchanged, with no mention of the proposed legislation review by the Office of Tax Simplification (OTS).

Please read on for the IHT headlines in more detail…

Charity donations
From 6 April 2012, the IHT standard death rate will be reduced from 40% to 36% when 10% or more of the net estate value is left to a registered charity.  The saving will increase the charitable donations and will not increase the amount received by any beneficiary. We note that this change and the calculations to be used are currently open to individual interpretation, and look forward to further clarification when the legislation is passed later this year.

Basic rules
The nil rate band is still frozen until 2014/15, but will then increase in line with CPI each following year. The DOTAS (Disclosure of Tax Avoidance Schemes) regime will be extended to include IHT planning via trusts from 6 April this year.  The regime will not apply to the WAY’s current range of IHT mitigation plans, but would affect any new trust based plans that we introduce.  We will of course provide as much information and assistance as we can when introducing any new plans that are subject to the DOTAS regime.

OTS review
Some expected an announcement regarding the Office of Tax Simplification (OTS)’s proposal that there should be a top down review of Inheritance Tax as a whole.  This was not forthcoming in this Budget, but may still be announced at some point in the future.  We believe that any changes would likely be made with the aim of raising more tax – the driver for change more practical than ideological.  We will of course keep an eye on this proposal and inform you of any effect this would have on the WAY range and your clients’ investments.

WAY has taken great care to ensure that our IHT mitigation plans are, and will remain, effective.  We liaise with HMRC on all new plans, concepts and subsequent changes in relevant legislation to make certain that our plans are still innovative and, above all, useful in the current financial environment.

Mark Benson, TEP CertPFS,
Technical Manager, WAY Investment Services Limited
28th March 2011
www.waygroup.co.uk

Posted on 28th March, 2011 | Tags: Basic Rules, Budget 2011, Charity Donations, Financial Planning, IHT, IHT Mitigation, Legislation |
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Climate change – socially responsible investing

‘Socially responsible investing will be one of the key themes over the coming decade and provides tremendous opportunities’ 

Even people who don’t buy into the climate change argument can still benefit from putting their money into socially responsible investments. Things are happening you can’t ignore and political momentum will provoke increased legislation on issues such as water purification and timber planting. Companies involved in these areas are going to benefit from these changes and that will provide fantastic investment opportunities.

This was the inspiration for the WAY Green Portfolio fund which was launched in February this year as part of a suite of products that are exposed to what are likely to be the most interesting and prevailing themes of the next decade. The aim of the WAY Green Portfolio fund is to provide capital growth with the potential for income through thematic investment in a diversified portfolio of collective investment schemes, investment trusts and a variety of other instruments. Taking a fund of funds approach, it invests in businesses that show a consistent approach to sustainable operations which means buying into funds from groups that can demonstrate a commitment, experience and track record in this sector.

Although we are a socially conscious firm we are not painting ourselves out to be environmental campaigners. We approach the area of socially responsible investing more from an investment perspective rather than with an evangelical zeal.

So how is the fund managed?
We have a distinct three screen investment process. Although we are the fund management company behind the portfolio we employ the services of seasoned experts in their fields to ensure the selections are viable. For example, the actual discipline of ensuring that the constituent parts of the fund are being put together responsibly is outsourced to Ethical Screening, which undertakes research and analysis into the corporate issues that concern ethical investors. The role of Ethical Screening is to examine funds which have the potential to be considered for inclusion in the portfolio. It brings rigour and discipline to the investment processand ensures funds adhere to their objectives.

As the fund manager, WAY itself is responsible for marketing and distributing the fund, while its compliance department ensures the funds chosen are allowable from a regulatory standpoint.

We are quite keen to look at interesting offshore funds as well because it gives investors an opportunity to get into products that might otherwise be impossible for them. Up to 20 per cent of our fund can be invested in non-UK regulated portfolios but very often these have a very high minimum investment which means clients can only access them as part of a wider fund offering.

Vestra Wealth LLP were awarded the mandate to manage the portfolio for their given ‘fund of fund’ skills and experience of this area. They will decide where to invest based upon a list of funds that have already been vetted and screened. It’s clearly very important that proper due diligence is carried out and we believe our process works extremely well.

Success for the company as far as the WAY Green Portfolio Fund is concerned centres on providing positive returns for investors – despite the stigma that suggests profits don’t matter as long as the investments are environmentally sound. We want to dispel the myth that you can’t make money in climate change funds. This fund is not just for socially responsible investors – it is for anyone wanting to make money from this growing area of the market.

WAY is obviously very well known for its inheritance tax mitigation solutions and we’re keen to highlight these can be used to wrap around the Green Portfolio itself. If someone is putting money aside as a legacy for their daughter, for example, this allows them to align it with doing something positive for the world in which she will live. Her legacy will benefit both her environmental and financial future.

The overall message from WAY to financial advisers is clear: climate change investing is a theme that simply can’t be ignored by investors. The primary objective of this fund will be to make a good return for investors. There are going to be companies in this area that will do well and, irrespective of their beliefs, investors will profit whilst supporting the efforts of those who do believe and are delivering social benefit.

Log on to: WAY Green Portfolio Fund for more information

Eddie O’Gorman,
Group Sales & Marketing Director, WAY Group
11th November 2010
www.waygroup.co.uk

Posted on 10th November, 2010 | Tags: Climate Change, Green Fund, IHT Mitigation, Socially Responsible Investing |
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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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IHT – avoid but don’t evade

It has been a frenetic few years for IHT mitigation.  Pre-owned assets tax (POAT) in 2004, the taxation of trusts in 2006, false promises by the Tories in 2007 and a major fall in asset values in 2008, have all kept taxpayers and financial planners well and truly on their proverbial toes.

Now Alastair Darling’s pre-budget report (PBR) has thrown yet another cat amongst the pigeons.  The double whammy this time is the removal of a previously legislated increase in the Nil Rate Band/NRB (under the Finance Act 2007, the personal nil rate band was due to rise to £350,000 in April 2010, but it will now stay at £325,000) and an attack on some specific strategies which have been using legislative loopholes relating to trusts.

Some commentators have speculated as to whether Darling’s comments in the PBR, about future legislation regarding trusts, spell the end for IHT mitigation as we currently know it.  In fact HMRC has no desire to upset conventional IHT planning using long-accepted trust-based solutions – all of which were brought into the taxable ‘relevant property’ regime in the Finance Act 2006.

HMRC and the Treasury remain fair and even-handed in their approach to collecting IHT.  All absolute gifts, at any level, remain potentially exempt transfers (PETs), whilst chargeable gifts to the full extent of the taxpayer’s NRB can be made every 7 years without any tax being incurred.  Furthermore regular gifts of any amount, from surplus after tax income, are immediately exempt.  All of these facilities remain, as do the various long-established trust schemes that have been available over the last decade and more.  It is flagrant abuse and the exploitation of inadvertent loopholes which is being attacked in forthcoming legislation.

As Nick Chadwick (well-renowned architect of some of the signature IHT mitigation schemes of the last two decades) recently explained to me “the acceptable spirit of tax avoidance has to reside within the house of fair play as secured in case law. Thereby evolving rules, where the law is inevitably silent on many issues, offer no protection from retrospective legislation at worst and swift blocking at best. HMRC will give confirmation of schemes that fall within the acceptable spirit of IHT avoidance. Failure to obtain this will be fatal for some providers, sooner or later”.

There are many conventional trust arrangements available, now and for the foreseeable future, which permit taxpayers to efficiently remove assets from their chargeable estates, whilst maintaining suitable ongoing flexibility for both themselves and their beneficiaries. There is therefore little need to seek out schemes which operate outside the confines of acceptable tax mitigation.

By far the bigger problem is the inertia suffered by many potential IHT payers who still seem to think this tax will somehow either mysteriously disappear or their estate values will be overtaken by the Tories enhanced NRB.  It should be clear to everyone at this point that for the foreseeable future there will be no appetite for either reducing or eliminating the impact of what is still seen as a wealth tax.  Not only does the ongoing budget deficit make it a non-runner but current public ambivalence toward MPs, bankers and others perceived as wealthy and privileged makes the easing of Inheritance Tax politically unthinkable.

George Osborne recently admitted on the Andrew Marr show that the Tory ambition to substantially raise the NRB was now pencilled in for later in their term of office.  But if New Labour can reverse actual enacted IHT legislation after only 2 years we surely know what expediency to expect from the Tories during their own turn in government.

With asset values likely to continue their recovery over the next year or two the business of carefully planned and executed IHT mitigation (particularly taking full advantage of somewhat depressed current values) is likely to blossom once more.  But be warned; HMRC will take an increasingly dim view of those attempting to exploit schemes operating on principles which rely on “reading between the lines” of existing tax legislation and are against the spirit of the law.

The two recently closed loopholes related to the purchase of (exempt) interests in excluded property trusts and the absolute gift (and therefore potentially exempt transfer) of retained reversionary interests within trusts. 

The first of these permitted a purchaser to buy (exchange taxable cash for) an exempt family interest in an exempt trust, thereby removing any future potential IHT charge from that value.  The second loophole involved the immediate and absolute gift of a retained reversionary interest which had already benefited from a discount to its value.  In this arrangement the taxpayer used a two step process to convert an otherwise chargeable gift into a combination of an initial small chargeable gift swiftly followed by a larger potentially exempt transfer.

In conclusion then, with the Tories recently announcing, that based on their analysis of ONS statistics in the newly published ‘Wealth in Britain’ report, some 4 million taxpayers are still likely to incur an average IHT bill of £60,000 (Guardian newspaper 29 December 2009) there is no time to lose.  Help your clients avoid this heinous tax by engaging in good down-to-earth IHT planning including, where necessary, the use of one or more of various highly-effective but conventional trust-based mitigation arrangements which remain available.

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 22nd January, 2010 | Tags: IHT Mitigation |
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When is a fund a portfolio?

Advisers’ own label funds are highly tax efficient
Clients who invest into IFA firms’ own-label portfolio-style collective funds can gain freedom from capital gains tax on their returns as well as keener pricing and the ability to mix and match funds.

When is a fund a portfolio?
Peter and Mary Singer are recently retired and have been taking advice on how to invest their surplus savings which, of course, includes tax-free lump sums from both Peter’s and Mary’s pensions.

Their adviser works within a major IFA firm which has its own fund management company offering discretionary investment management to clients such as the Singers. They have been advised to place a large part of their available funds within the firm’s own portfolio style collective funds with a smaller proportion directly invested in specialist funds and shares. They are concerned as to whether they are being shepherded into a fund which is as much for the benefit of the adviser as it would be for them.

This is an interesting dilemma which in some ways is part of the focus for the FSA’s current work on the much heralded Retail Distribution Review (RDR) and their recent thoughts on the merits or otherwise of ‘Distributor Influenced Funds’ (DIFs).

The answer lies in provenance
Following the 1980s scandals surrounding broker bond funds it would be lazy to simply write off ‘own label funds’ as yet another self-interested money-making idea for adviser firms. In fact in almost all cases this would be an incorrect assumption. To put these portfolio-style funds into context we need to follow their provenance from the discretionary investment services which have existed for more than a century, to their current highly contemporary manifestation.

It was traditionally the stockbroker to whom investors turned and the stockbroking community has a long history of managing individual bespoke portfolios for wealthy investors. The benefit of bespoke services was that each investor’s own requirements could be satisfied, by an individually-tailored selection of investments making up a personal portfolio. Furthermore the client was in direct personal contact with their stockbroker and was able to derive confidence from the personal nature of the relationship. Going back one hundred years or more the whole industry worked in a more leisurely and controlled manner than hitherto, commensurate with the limited speed of communications and administration of the day. In spite of increasingly volatile markets throughout the 1920s and 1930s, the manner in which these services operated continued undisturbed.

Sea change in control
It was only in the 1980s that a major sea change occurred following Margaret Thatcher’s removal of exchange controls in 1979. Investment managers then had increasing access to the international markets in order to buy shares in successful companies from across the world at the forefront of the new age of globalisation. This coincided with the information age when computerisation and global media access changed the investment scene forever. From that point on it became extremely difficult to operate effectively as a private client stockbroker whilst holding oneself out as an investment manager. Each of those jobs became so specialised that it was impossible to do both well. Either you were a client-facing stockbroker or you were a specialist investment manager. This demarcation has fed through to the typical high net worth advisory firms of today, whether stockbrokers or financial advisers, and the person you see for advice is generally the GP who within the practice employs investment specialists to actually manage client portfolios.

Own-brand portfolio evolution
All very interesting, but the relevance of ‘own brand’ portfolio-style funds is a direct consequence of this evolution and the various factors behind it. I remember managing over 700 individual discretionary portfolios back in the 1980s in the build-up to the market crash of 1987. When a change of direction was called for, my colleagues and I trawled through every single portfolio marking out the necessary re-balancing prompted by our strategic decisions. This certainly meant that every client received our individual attention but the process was fraught with stress and difficulty.

I recall many times when we worked through the night, collating all the dealing which we deemed necessary and which, in an ideal world, we should probably have done a day or two earlier had our systems allowed it. The problem was that any decision, say, to reduce exposure to Japan, which had fallen some 12%, in favour of an opportunistic exposure to Hong Kong, which had fallen more than 50%, involved a real decision on each client’s individual portfolio. This was because every single client had a slightly different Japanese exposure, depending on when they joined the service and which Japanese funds were favoured at the time. This scramble to re-balance portfolios rarely involved an examination of each client’s Capital Gains Tax (CGT) status because there just was not enough time to take that into account. This could always be justified by not allowing the ‘tax tail to wag the investment dog’.

The rise of the model portfolio
The result of that 1980s stockmarket fallout was a move by investment managers to convert these bespoke portfolios into ‘model’ portfolios, where clients with similar objectives and attitudes to risk held identical but suitably scaled portfolios. These were then deliberately managed for investment results and CGT was put to one side. With this new ‘model’ approach every single portfolio could be re-balanced in a trice because they were identical and could be managed via a simple spreadsheet.

Then in 1991 the unit trust regulations were changed, to allow collective funds which contained other collective funds to operate on a commercially viable basis. This was the penultimate step in the evolution of unitised portfolio management via portfolio-style funds. Compared with the evolved ‘model’ portfolios these new collective portfolios offered far greater economies of scale, much keener pricing (because of greater bargaining power) and complete freedom from CGT on underlying management. My firm ‘share-exchanged’ most of those 700 portfolios spread across three ‘models’ into three newly-constituted unit trusts launched specifically for that purpose.

The most recent changes to regulations have allowed collective funds to mix and match underlying funds and direct equity investment, as well as to blend a much wider range of asset classes. This means that contemporary portfolio-style funds can now comprehensively and effectively mirror and replace virtually any (far less efficient) individual, bespoke portfolio.

Trust in financial advisers
There may be very good reasons why the Singers should seriously entertain the advice of their financial adviser. The first is that a good local and personal investment management department can be met and ‘eyeballed’ by the client to offer regular reassurance about the style and substance of the management – there is far more accountability.

Secondly a good portfolio manager is not quite the same as a good fund manager. The portfolio manager is running portfolio substitutes and therefore has a keener eye on the overall risk aspects of managing the client’s money. The specialist fund manager works to very tight specifications regarding where they can invest and to what extent they can protect their funds by going liquid (the majority of specialist funds require the manager to remain relatively fully invested within their specialist area since that is the objective of the fund as specified in the prospectus).

A word of warning regarding the current obsession with performance tables. Do not be tempted to buy a portfolio-style fund based on performance tables. The job of a portfolio-style fund is to deliver safe and competitive ‘portfolio’ performance.

This means that individual constituents of the portfolio (the underlying holdings) need to be competitive within their own sectors, from a performance perspective, but the overall portfolio itself is meant simply to offer a sensible and rounded financial lifestyle solution.

Paul Wilcox,
Chairman & Technical Director, WAY Group.

Posted on 9th October, 2009 | Tags: Capital Gains Tax, CGT, IFA |
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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 |
Comments: Have Your Say

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