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Find the exit

It is that time of year again. As we approach the end of the tax year, the minds of many advisers will turn to last-minute tax planning.

Aside from the inevitable annual rush for Isas, there will be top-ups to pensions, carryback and carry forward and capital gains tax planning, all combining towards a hectic but remunerative few weeks running up to April 5. As we approach the start of a new tax year, it is perhaps wise at this stage to see if there are any alterations we can make to the way we work which could further benefit our clients.

For example, there may be many clients talking to their IFAs over the next few weeks who will be putting money into Isas almost without thinking.

Articles in the press and heavy ad campaigns at this time of the year encourage clients to use annual Isa allowances before they are lost.

While for the majority of the investing public this is certainly true, there are some who perhaps should take stock of their existing holdings of Peps and Isas which, in many cases and in increasing numbers, will exceed the nil-rate band for inheritance tax.

We see many ads and articles extolling the virtues of “tax-free” Peps and Isas but they are, in fact, only free of income and capital gains tax.

Both Peps and Isas are fully taxable for inheritance tax and, when the combined holdings exceed the nil-rate band, the client will eventually suffer inheritance tax at 40 per cent on the value in excess of the nil-rate band subject to any exemptions that may be used.

Neither Peps nor Isas can be held within a trust and therefore are highly inflexible in terms of inheritance tax planning.

In some cases, it may be worth considering capping clients&#39 holdings of Peps and Isas and looking at alternative investment vehicles.

At the other end of the scale from Peps and Isas, clients with big portfolios of shares turn their attention to the CGT position which they face at this time of year, spurred on by the possibilities of using their annual exemptions.

It is a good time to sit with such clients and consider their overall taxation position and to provide advice on exit strategies from burdensome CGT problems. Many clients spend years building up CGT liabilities which they then seek to address in a space of a single tax year.

For these clients, it is perhaps worthwhile suggesting an exit strategy using their annual exemption and offsetting gains and losses planned over a period of years.

As with Pep and Isa investors, these clients will also require advice on inheritance tax planning since it is intrinsically linked with their investment portfolio. Those portfolios pregnant with CGT left untended enjoy the benefit of rebasing of CGT on death but often at the expense of a higher bill for inheritance tax.

IFAs active in this market may want to consider the use of international products which currently seem to dominate the inheritance tax planning market.

The reason that international products seem to be more favoured for inheritance tax planning is to be found in the long-term nature of these forms of investment.

Many insurance companies with international subsidiaries offer capital-based investment plans which, when combined with trusts, provide a package which avoids inheritance tax while allowing some access to the underlying investment.

If one considers that a client must be investing with at least a seven-year view to make the most of potentially exempt transfers regulations, it is fair to suggest that this type of client has a much longer-term outlook than the average investment client. For this reason, the benefits of gross roll-up (with the exception of withholding tax) becomes a much greater factor in the decision-making process.

As we come perhaps to the end of the first term of the present Government, it is worth considering that the offshore marketplace has withstood the test of time through two different administrations and has placed itself on a firm footing.

International bond sales now represent a market which is bigger than that for UK unitlinked bonds. With the trend of wealth ownership set to increase, the international investment market for UK residents can only go from strength to strength.


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