James Priday, chief executive at P1 Investment Services, explores how Lombard lending could offer advisers a more flexible way to help clients access liquidity without disrupting long-term investment plans.
A recent adviser webinar revealed significant knowledge gaps around secured lending against portfolios – yet the planning opportunities are substantial
As another tax year came to a close earlier this month, advisers were undoubtedly inundated with panicked client calls. It happens every year.
A client calls in the lead up to April 5th to say they’ve withdrawn from their flexible ISA and while they’d fully intended to reinvest before the deadline, circumstances have changed and the cash isn’t there.
Losing that tax year’s full ISA allowance is now a distinct reality.
For many, the answer is either “nothing we can do” or “sell something”. Neither is particularly satisfying. The first permanently surrenders the ISA allowance. The second triggers potential capital gains, disrupts the long-term investment strategy, and erodes the assets under management your firm depends on.
There is, however, a third option, one that private banking clients have quietly relied upon for decades, but one that remains largely unknown and untapped among many UK advisers and one which could help rectify this issue ahead of the next tax year end.
Lombard lending remains remarkably under the radar among mainstream UK advisers. In fact, a recent webinar hosted by Firenze and P1 Investment Services revealed that 45 percent of advisers said they had no previous experience with Lombard loans, while a further 42 per cent were unsure if they were familiar with them or not. Just 13 per cent confirmed they had used them in practice.
Bridging the gap
Given the versatility of the facility, those numbers suggest a significant advice gap.
For the uninitiated, a Lombard loan is secured lending in which a client pledges their investment portfolio as collateral, typically accessing up to 50% of its market value depending on the assets’ liquidity and volatility. Crucially, the investments remain in place and continue to be managed by the adviser. The facility functions much like an overdraft: clients draw down and repay as they see fit, paying interest only on the amount outstanding.
One of the most compelling, but often neglected, use cases sits squarely in the everyday world of ISA management. Going back to the initial client scenario that sees the client permanently lose a portion of their ISA allowance, a Lombard loan could have bridged the gap. By borrowing against the existing portfolio for a matter of days, weeks or months, the client reimburses their flexible ISA before tax year-end, protecting the full allowance. Once the expected funds materialise whether that be through a bonus, a property sale, the proceeds of another transaction, they simply repay the Lombard loan facility.
The cost of that short-term bridge is modest when compared to the projected longer-term saving. In one illustrative scenario presented at the recent webinar, a five-day bridge on a £95,000 shortfall carried a total cost of approximately £1,041 in arrangement fees and interest. Set against the projected capital gains tax exposure of over £9,000 on five years of lost ISA-sheltered growth for a higher-rate taxpayer, the arithmetic is persuasive.
From awareness to action
Perhaps more encouraging than the current awareness gap is the appetite advisers showed once the concept was explained. After the session, a third of respondents identified Lombard lending as a key tool for advisers going forward, with a further 27 per cent deciding to now evaluate its potential.
When asked which specific planning areas they saw as most relevant, 29 per cent pointed to inheritance tax planning. Lombard lending is an underutilised tool for estate planning. It can be used to support gift strategies, contribute to estate reduction or help to avoid forced asset sales to meet IHT bills.
A further 26 per cent pointed to broader tax planning as an area that could benefit from Lombard loans, supporting CGT deferral strategies or bridging a gap between a tax bill and a future liquidity event.
Another 7 per cent considered using a Lombard facility instead of a bridging loan to fund a property purchase, offering a fast and cost-effective alternative without the need for property valuations or fixed-term repayment requirements. Those responses hint at a product whose moment may be arriving”
The benefits extend beyond the client. For advice firms, Lombard facilities help prevent the asset outflows that erode recurring revenue. When a client needs liquidity, the traditional solution is to sell down investments triggering potential capital gains, disrupting long-term strategy, and reducing assets under management. A lending facility sidesteps all three.
There are, of course, considerations. As with any secured lending, if portfolio values fall significantly, clients may face margin calls or be required to provide additional collateral.
Nevertheless, the case for greater adviser engagement with Lombard lending looks strong. At a time when tax efficiency, intergenerational planning, and client retention are at the top of every firm’s agenda, a flexible, cost-effective liquidity solution that keeps portfolios intact and protects hard-won tax allowances deserves far more attention than it is currently getting. The 45 per cent of advisers who have yet to explore Lombard lending may want to take a look.
