Affluent investors are reviewing how they structure and pass on wealth as uncertainty over potential tax changes ahead of the Autumn Budget intensifies, according to Rathbones, with the wealth manager reporting a spike in client interest in offshore bonds and wider tax planning strategies.
Rathbones says conversations with clients are shifting away from investment selection and towards tax exposure, with capital gains tax and inheritance tax reforms among the primary concerns. Many clients are reassessing whether existing financial plans remain appropriate in the event of policy changes.
The firm has modelled the potential impact of CGT rate alignment with income tax. Under that scenario, an additional-rate taxpayer making a £50,000 gain outside tax wrappers could see their tax bill rise from £11,280 to £21,150, an increase of £9,870. Higher-rate taxpayers could see tax on the same gain rise from £11,280 to £18,800. These are Rathbones' own projections based on hypothetical scenarios and not confirmed policy.
Rathbones' analysis also examined the potential impact of removing the CGT uplift on death. Under that scenario, beneficiaries could face a tax bill approaching £120,000 when selling an inherited property that had risen in value by £500,000 during the original owner's lifetime.
Isabella Galliers-Pratt, senior investment director at Rathbones, comments: "Uncertainty around fiscal policy does tend to prompt people to review their financial plans, but investors should be careful not to let tax considerations alone drive major financial decisions; as the saying goes, don't let the tax tail wag the investment dog.
"We've seen clients move from asking 'What should I invest in?' to asking 'How exposed am I if taxes rise again?' That's a noticeable shift in mindset. More people are reviewing how they invest, how they structure their assets and how they'll pass wealth to future generations. Budget uncertainty is acting as a catalyst for those conversations."
Against this backdrop, Rathbones says offshore bonds are appearing more frequently in client planning conversations. Unlike general investment accounts, offshore bonds allow investments to grow without annual UK income tax or CGT being applied year by year, with taxation generally deferred until a chargeable event occurs, such as certain withdrawals or surrender of the policy.
Rathbones positions offshore bonds as particularly relevant for investors who have exhausted ISA and pension allowances. Features the firm highlights include tax-deferred growth, greater control over when gains become taxable, policy segmentation and the ability to assign policy segments to family members, which can support retirement income planning, intergenerational wealth transfer and estate planning. By reducing annual tax drag, the firm says offshore bonds can also support long-term compounding.
The wealth manager is clear that offshore bonds are not suitable for every investor. Their benefits are, in Rathbones' view, most pronounced for higher and additional-rate taxpayers who have fully used available ISA and pension allowances and are seeking additional planning flexibility.
Matthew Smith, chartered financial planner at Rathbones Financial Planning, explained: "Once ISA and pension allowances have been fully used, investors naturally start asking what other options are available. We're seeing offshore bonds come up much more often as part of our financial planning conversations with clients than they did a few years ago.
"For some investors, offshore bonds offer the ability to defer tax and have greater control over when gains become taxable, which can support retirement planning, estate planning and intergenerational wealth transfer objectives.
"Importantly, offshore bonds aren't about avoiding tax. They are one option that can help build financial plans that can work effectively in a changing tax environment."
Galliers-Pratt concluded: "Investors shouldn't tear up long-term financial plans on the basis of Budget rumours. The best plans are designed to withstand changing governments, changing tax regimes and changing market conditions. Reviewing your affairs ahead of a Budget is sensible. But any decisions should be driven by your long-term objectives rather than political headlines."
