Uncertainty proves value of balanced portfolio


If we consider successful wealth management as a combination of appropriate taxation and investment strategies, then this uncertain time for both aspects provides a potential conundrum.


Depending on who you speak to, there’s either pervading gloom about whether we’re going to get a progressively more penal tax system that punishes the wealthy, or a sense that the expected higher taxation won’t be so onerous as not to present clear tax planning opportunities.


On investments, there is worry over the stagnation in global markets, sovereign debt issues, devaluing currencies, such as the Euro, and the spectre of inflation; and there is also optimism that we are making the first tentative steps to struggle free from global recession and will enter a new dawn.


If we stick to the here and now, it’s clear that low interest rates and the impact of inflation have made investing in cash unattractive, other than as a short-term perceived protector of capital. By the time you have had any returns, had them taxed, and then taken into account inflation, you’re not actually preserving or enhancing wealth, you’re devaluing it.


All this has pushed up the price of gold (which is at record highs) and makes other commodities like oil attractive as a hedge against inflation, and many wealthy individuals are currently looking at these options as part of their portfolios.


On tax planning, the kibosh has been put on pension tax relief for high earners and, at the time of writing, we are likely to see a closing of the gap between the rate at which income and capital gains are taxed.


This is all likely to bring the use of investment bond tax wrappers to the fore again, where investment portfolios are held in an onshore and offshore investment bond, rather than directly where they would be subject to capital gains tax. The attraction in these investments is that they allow for the deferment and controlled timing of taxation in the future. While subject to income tax, they could well prove preferable to capital gains tax alternatives, especially for active portfolios.


The fact is there isn’t one solution and, as always, the moral of the story is that it’s prudent to have a balanced investment portfolio.


What wealthy individuals can and should be doing now is sitting down with their professional advisors to review their wealth in light of the developing situation in both the markets and tax landscape.