Now that the dust has settled on Rachel Reeves first budget, we thought some guidance about what actions to take might be more helpful than just a summary of the changes. This blog post won’t cover all of the changes, there are plenty out there that do that. We will try to cover the direction of travel and the planning opportunities for individuals.
CGT
There was good news on Capital Gains tax on investments, as the basic rate was increased from 10% to 18% and 20% to 24%. This is good news for investors because it means that tax on capital is still taxed at lower levels than the last half a century. Rates are still lower than income tax and so the environment still favours General Investment Accounts over investment bonds. We have had 15 years now of investment bonds being questionable tax planning as they convert gains (usually taxed at a lower rate) into income (usually taxed at a higher rate). There are rare individual circumstances where this is better but not anywhere close to the levels that they are sold at. Maybe, just maybe, there are other reasons why investment bonds are used by some advisers (always look for the financial motivation). Business owners will retain their 10% CGT cap of £1million which is good news. This rate will increase to 14% in April 2025 and 18% in April 2026. It is therefore worth thinking about sale or gift to the next generation before these dates if you were already considering it. If not, then sale to an Employee Ownership Trust is still an option that attracts 0% CGT.
IHT
There was also good news on Inheritance tax as there were no complicated reforms to Business Relief, just the introduction of a per person cap of £1million from April 2026. Although a small number of larger businesses and farming partnerships will be negatively affected (not as many as the coverage would suggest), most estates liable to inheritance tax (already a tiny number) will find that joint Nil Rate Bands of £1million plus up to £2million in Business Relief qualifying investments is plenty to cover them. To benefit from Business Relief there are qualifying investments that individuals can use and enjoy exemption after just two years (much shorter than gifting money). Watch out for potential future tightening of the qualifying rules but this cap is a support to this type of investment. Be aware that a spouse doesn’t inherit their spouse’s £1million Business Relief cap and so if affordable it may get make sense to gift any Business Relief qualifying investments to the next generation on first death. This could have a double benefit as estates worth more than £2million have the joint Nil rate band reduced down as low as £650,000 and Business Relief qualifying investments are included in this calculation. The bad news is that pensions are going to be included in your estate for inheritance tax from April 2027. The new narrative is that pensions are for your retirement and not your children’s retirement. Pensions have only been IHT exempt for a decade and so this is more a return to normal, but it is particularly tough on those who are in later retirement now. They have not been drawing and spending pensions based on the rules as they knew them and are now getting too old to be able to take action. Even worse they can’t do much for another two and a half years until the rules actually change. Before 2027 pensions are still IHT exempt and so making any changes now could make matters worse. Careful consideration should be given to your pension death benefits though as for this next period, if affordable, it might make more sense to nominate these to children or even a trust. After 2027, if the rules don’t change, then action is needed around pensions. With planning the tax situation for pensions post-75 needn’t be that much worse than it has been. Under the current rules you can leave your pensions untouched and let your children inherit without IHT. They then have a pension fund which when they reach retirement they can draw and pay tax on. If they are higher rate income taxpayers, they have saved 40% IHT and pay 40% income tax in the future. In the new world, you can draw your pension and pay 40% income tax. Provided you then do something to exempt that money from 40% IHT your children are no worse off. Exempting this money from IHT is complex but there are ways of doing it with immediate effect. Contact us if you want to discuss further.
Summary
All of these measures point to a new tax environment where the right planning is going to be ‘give more, give sooner’. Businesses, farming partnerships, Business Relief Investments, pensions all will benefit from being moved out of your ownership sooner rather than later. This doesn’t mean directly to children (we know you sometimes don’t trust their choice of life partner), there are plenty of trust options. The starting point is always going to be an assessment of what you can afford to give and what you need to spend. Cashflow planning is crucial for this calculation. The Budget is a boost for proper financial planning done well. Just don’t tie your adviser’s income to the value of your portfolio. If the right advice is to spend and gift your money don’t incentivise your adviser to tell you to do the opposite. In the new world we need to get good at aiming for zero on your deathbed and letting the cheque to the undertaker bounce.
