Investment Planning; Borrowing to plan and more. 

Contents:

• Borrowing to plan 
• FCA consults on post-Brexit divergence for PRIIPS 

Borrowing to plan  

(AF4, FA7, ER1, LP2, RO2, RO7) 

The Sunday Telegraph reports that low interest rates are encouraging the rich to borrow to avoid encashing investments. This also, the report states, avoids / defers capital gains tax (CGT) on a realisation that might otherwise need to take place. 

Whenever there are funds that can be accessed from assets (including investments) to borrow instead requires a careful consideration of risk, interest commitment versus return on unrealised investments. The lower interest rates and current good returns are the key drivers of this apparent attraction. 

In the past, there have been strategies considered based on “borrowing to tax efficiently invest” e.g. borrowing to invest in excluded property so that the debt reduces the borrower’s taxable estate and the assets acquired are not “counted” for inheritance tax (IHT). Anti-avoidance provisions mean that this no longer works. 

On the other hand, in the right circumstances, taking a later life mortgage could be used to: 

• avoid drawing down on a highly tax efficient pension; or
• facilitate a lifetime gift that would not have been possible otherwise (due to the illiquidity of assets, g.the main residence). 

These two uses of later life mortgages, the former on a drawdown basis* and both with fixed interest rates (and, potentially, with the debt reducing the taxable estate - the availability and relationship of the residence nil rate band to the property value being important in this regard) can sometimes and in the right circumstances (stress sometimes) lead to beneficial outcomes. 

Careful consideration and scenario planning is absolutely essential though before proceeding with any such strategies. 

For example, it’s important to note that the value of the residence nil rate band for an estate will be the lower of the net value of the interest in the home (after deducting any liabilities such a mortgage) or the maximum amount of the residence nil rate band. So, a loan which is secured on the house reduces the amount of residence nil rate band potentially available.  

*With a drawdown later life mortgage, you can take an initial lump sum, and then release smaller amounts when required.  

FCA consults on post-Brexit divergence for PRIIPS  

(AF4, FA7, LP2, RO2) 

The FCA has set out proposals to change disclosure documents provided to retail investors under the Packaged Retail and Insurance-based Investment Products (PRIIPs) regulation. 

The changes are intended to provide more clarity to consumers about what the products are, the risk presented and information to help understand likely future performance. 

The PRIIPs regulation was developed to renew the confidence of retail investors in the financial market and improve their protection. Those who produce, advise on or sell PRIIPs are required to provide a Key Information Document (KID) about the product they are selling. 

However, for some products the KID has potential to contain misleading information as a result of the methodologies used in producing performance scenarios and summary risk indicators. There has also been a lack of clarity within the PRIIPs regime over the corporate bond market. This has led HM Treasury to confirm that the UK will diverge from EU PRIIPs regulation to better protect its consumers. 

The FCA is consulting on the most serious concerns over PRIIPs and proposes to: 

• Clarify the scope of the PRIIPs regulation making it clearer that certain common features of these instruments do not make them into PRIIPS and guidance on the meaning of PRIIPs being ‘made available’ to retail investors;
   
• Amend the PRIIPs Regulatory Technical Standards to:require written explanation on performance in the KID; combat the potential for PRIIPs being assigned an inappropriately low summary risk indicator in the KID; and address concerns over applications of the slippage methodology when calculating transaction costs. 

Subject to the outcome of this consultation, the FCA plans to amend the PRIIPs RTS by the end of 2021, with any changes made coming into effect on 1 January 2022. 

You can read the full consultation here.