Bonds remain vital for IHT planning, says Lincoln

Lincoln Financial Group is urging advisers to focus on the IHT and tax planning benefits of investment bonds following the Government’s confirmation in the Budget that the proposed changes to Capital Gains Tax (‘CGT’) of introducing a flat rate of 18% and removing taper relief and indexation allowances, will take place.

And it believes the new CGT regime will be good news for financial advisers by highlighting their expertise in providing clients with advice on investment bonds.

Lincoln Financial Group argues that bonds will remain a significant part of the investment landscape despite claims that the introduction of the flat rate of CGT will limit the use of bonds and significantly boost the market for unit trusts.

Following the publication of the Pre-Budget report in October 2007 which proposed the CGT flat rate, the insurance industry called for a lower rate of taxation on gains arising from investment bonds to reflect the CGT changes. However, the Budget confirmed that: ‘The Government does not see the need for any change to the taxation of life and insurance bonds as a result of CGT reform.’ The Treasury’s analysis has shown that the CGT reforms will make very little difference to the overall balance between investment in unit trusts and investment bonds for higher rate tax payers.

Lincoln Financial Group believes that there will still be a “significant market for investment bonds”. Its research suggests that more bonds are sold for IHT and income tax planning than for CGT mitigation purposes. Lincoln’s analysis shows that the majority of advisers did not think that the proposed changes in CGT would have a major impact on the volume of new investment bonds.

Ian Noble, Head of Life Sales at Lincoln Financial Group, commented: “Suggestions from various parties that the CGT changes will dent the appeal of investment bonds tend to ignore many of the reasons investors favour them. Choosing an investment bond over a unit trust is a complex process, and while the tax implications – many of which are still in effect – do play a part, there are other considerations to bear in mind.

“Our view is that the flat rate of CGT enhances the role of advisers who have an important role to play in cutting through the confusion caused by claims that bonds are now disadvantaged against unit trusts. That is not our experience and research since the Pre-Budget Report bears this out.”