Danby Bloch: Don’t put clients’ tax planning eggs in one basket

Advisers are in danger of using too few solutions for both income and estate planning

Danby BlochDiversification is not just an important strategy for investment – it also makes sense when it comes to tax planning.

The current low level of new business flowing into life assurance bonds on platform strongly suggests advisers are in danger of using too few solutions for both income and estate planning.

Of course, in the days before the RDR and the widespread use of platforms, it might have been argued advisers were sometimes overly keen on life assurance investment bonds.

But now the trend seems to have swung the other way – only about 3 per cent of assets on adviser platforms is held in the form of UK or offshore bonds, according to recent Platforum research.

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Unsurprisingly, the main focus of inheritance tax planning is on pensions and business property relief investment. And there are good reasons for their popularity, seeing as they provide the irresistible and currently politically-fashionable attraction of both having your cake and eating it.

You can hold on to the asset in your estate and access it for spending if the need arises but it is free of IHT at the same time.

There is, of course, a requisite two-year wait for a BPR investment to qualify for IHT freedom, although that does not normally present a serious problem for most clients.

What could be better than that?

Not much. In the case of BPR, the investor probably has to accept more risk than is perhaps altogether desirable. But the returns may be OK or even better with luck and the wind behind them. Indeed, the investment would have to be pretty catastrophic to end up being significantly worse than suffering 40 per cent IHT.

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In any case, even if the original investor takes a relatively short-term view, their beneficiaries may well be able to weather investment storms and sail through to better times and returns. AIM portfolios can be held in Isas and capital gains tax is effectively wiped out when the investor dies.

Likewise, pensions are currently IHT-free on death, although the age at death means there is something of a tax lottery. Still, the underlying investments should be more mainstream and less volatile, especially with a foundation of fixed interest.

What is not to like, however, is that neither of these tax privileges are guaranteed to survive a Labour government or even the current chancellor, who has set the Office of Tax Simplification to review IHT.

The OTS has asked interested parties for their views on a whole range of issues, including BPR, pensions and life assurance.

The current structure of BPR is very generous by international standards. And while there are some solid reasons it might possibly survive in its current form, things can change quickly.

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Family businesses are arguably the backbone of UK enterprise, so encouraging them to take an intergenerational long-term view makes a lot of sense for the government. But some would argue these reliefs can also stultify enterprise and reinforce social immobility and privilege. The tax breaks have survived several decades of different governments but they might not continue to be so generous in the future.

AIM portfolios are popular BPR vehicles and AIM’s success is underpinned to a considerable extent by the IHT privileges it provides to many of the trading companies listed on the junior market. But some commentators argue it is illogical to give huge AIM-listed companies tax privileges that main market companies cannot share.

The tax breaks have survived several decades of different governments, but they might not be so generous in future

Other lump sum IHT planning has very much taken a back seat. Platforum research suggests many advisers are recommending leaving the pension commencement lump sum untouched if the client does not need it for expenditure. That might well be right in some circumstances but it misses the opportunity to diversify.

If tax changes are in the offing – whether from the OTS review or a radical approach by a future government – it makes sense to put a client’s tax planning eggs in more than one basket.

And if advisers end up still recommending just pensions and BPR for IHT planning, it might be prudent to point out to clients these could be curtailed in the future or even disappear altogether.

Danby Bloch is chairman of Helm Godfrey and consultant at Platforum

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