The Labour government has been in office for a number of months – and one thing has been continuously written about chancellor Rachel Reeves – she will increase taxes in October’s Autumn Budget.
Rumours abound that both Capital Gains Tax and Inheritance Tax may be in the firing line for Reeves to bolster the UK Treasury coffers to fill the “£22 billion black hole”.
This has forced advisers and their clients to proactively financially plan – as they brace themselves for what will happen on 30th October 2024.
However, there is a solution that could help advice clients ease the potential rise in taxes – Lombard Loans.
What are Lombard Loans?
According to analysis from Deloitte, the global Lombard lending market stands at $4.3 trillion today and is growing at around 5 – 10% a year.
So, how do Lombard Loans work? The loans are based on the collateral of liquid investment assets, such as equities, bonds, funds or commodities. Lombard lending is best analogised as a mortgage against a portfolio. As with a mortgage, there is a loan-to-value (LTV) ratio, which is a percentage of how much a borrower can borrow against the value of the investments.
After pledging a set amount of liquid assets as collateral, the lender can then assess how much they can lend, giving the borrower their LTV. As illustrated in the example below.
With Lombard Loans, interest payments are required, but the interest rates will normally be lower than other forms of credit as the collateral is highly liquid and, depending on the value of the portfolio, allow a much larger sum to be drawn.
Lombard lending requires ongoing monitoring, as naturally the value of the collateral will change daily in line with markets, and this will affect the nature of the loan.
Tax benefits of Lombard Lending
One of the main benefits of Lombard lending is how it can be used for client tax planning, as no sale of asset is required to generate liquidity. This incentivises long-term investment, as borrowers can keep their investments where they are, but still borrow.
This means no Capital Gains Tax is incurred when you borrow against assets, rather than selling them. For some clients, tax benefits form a core for why they use Lombard lending. Through spreading asset disposals over tax years or longer term IHT planning through considering both sides of the balance sheet; advisers can use Lombard lending as part of sensible client tax planning.
Not all Lombard lending users focus on the short-term, however. Long-term gifting strategies to family is a well-trodden use case. Often borrowers want to support their children on to the property ladder but do not want to disrupt their own investment plans; by using their portfolio as security they can give extra funds to their children to acquire property and allow their children to repay some or all of the loan over a longer-term basis; re-inventing the bank of Mum and Dad.
These types of use cases are common regardless of the rate-cycle, however, when rates trend lower, it is often the case that borrowers will use Lombard lending for leveraging their assets. When used conservatively and by borrowers with the necessary sophistication, this can underpin long-term wealth building.
From a business standpoint for advisers and wealth managers, Lombard lending as part of their proposition can help attract and retain clients, creating a “stickiness”, as well as prevent the most valuable clients moving to private banks.
How to access Lombard Loans
Despite clear tax benefits for advice clients, there are still some serious blockers within the industry that prevent the widespread availability of Lombard lending.
Lombard lending, which is often the last tool kept in the armoury of private banks, is a simple lending solution. While there may be variations from lender to lender, the idea of the loan is the same.
The problem is, the modern Lombard loan is typically reserved for HNW private banking clients. That means advised clients have traditionally not been able to access Lombard Loans – that is until now. And our own solution ensures clients in the wealth and advice market can make use of these loans for the first time.
In our opinion, the perfect solution uniquely blends technology, compliance and capital, allowing any wealth manager or financial advisers to offer flexible, affordable Lombard loans to their clients. This is delivered through customer-centric technology, with an end-to-end digital journey for liquidity in days not weeks. All without needing to move custody, to help attract and retain assets.
Advisers should look to leverage Lombard lending more as part of sensible liquidity management and investment planning for their clients – especially if the tax burden grows for clients come 30th October.
By David Newman, Chief Executive at Firenze
![[UNS] tax](https://ifamagazine.com/wp-content/uploads/wordpress-popular-posts/776464-featured-300x200.webp)
