Pensions and Inheritance Tax
You may have read about the budget on 30th October and one of the biggest announcements which was undoubtedly the proposal to include pensions in estates for Inheritance Tax (IHT) from April 2027. We are writing to you now to urge that you take no action in respect of this for the immediate future for the reasons set out below.
The main reason for this is that the planned changes are for the moment at the proposal stage and may be varied, potentially significantly before they become law. There is currently a consultation which is open until 22nd January 2025 for interested parties to provide their views on the detailed regulations required to implement these changes. Following this consultation, it is expected that the draft legislation will be issued in the second half of 2025 and is expected to come into effect in April 2027.
Therefore, the current legislation will remain in place until April 2027. Thus, there is no need to make any immediate decisions concerning your pension, and we would recommend not making any changes at least until the draft legislation is confirmed later in 2025 as the current rules will remain until April 2027.
It is clear from the wording in the consultation paper that the Government and HMRC want pensions to be used for retirement income rather than as wealth protection plans. “In recent years, pension schemes have been increasingly used and marketed as a tax planning tool to transfer wealth without an Inheritance Tax charge, rather than for their intended purpose of funding retirement.” It should be noted that when the pension rules changed in 2015, known as Pensions Freedoms, this was the first time that this type of financial planning was allowed.
The planned changes would mean that from 6th April 2027 most unused pension funds and death benefits would be included within the value of a person’s estate for Inheritance Tax purposes. In effect, most monies that are in a pension fund at the date of death, would be treated as being part of that person’s estate and may be liable to IHT.
We will of course keep you informed and, once the legislation is drafted, we will be better placed to provide planning advice to you in this regard. However, and to reiterate, at this time we would not recommend taking any action whilst these are still proposals not planned to be implemented until April 2027. Until that time all the current rules are still in place, meaning most pensions are outside of IHT.
If you do have any immediate concerns about the proposed changes, please do not hesitate to contact your adviser, who will be happy to talk these through with you.
UK
Autumn Budget: in Labour’s first Budget since 2010, Chancellor of the Exchequer Rachel Reeves unveiled what the Office for Budget Responsibility (OBR) described as “a large, sustained increase in spending, taxation, and borrowing”, including £40 billion-worth of higher taxes alongside increased investment1 in health, education, defence, housing, and infrastructure. The rate of employers’ national insurance contributions was increased from 13.8% to 15%; meanwhile, the lower rate of capital gains tax was raised from 10% to 18%, and the higher rate was raised from 20% to 24%. Inherited pension pots will be liable to IHT from April 2027. Income tax thresholds will remain frozen until 2028-29.
Budget reaction: the OBR warned that the Budget represented "one of the largest fiscal loosenings of any fiscal event in recent decades". As investors digested the Budget’s potential impact, the yield on the UK benchmark gilt rose to a 12-month high, the pound weakened against the US dollar, and sentiment towards medium-sized and smaller companies waned. Over October as a whole, the FTSE 100 Index fell by 1.5%, while the FTSE 250 Index declined by 3.2%.
Inflation eases: the annualised rate of consumer price inflation moderated from 2.2% to 1.7% during September, reaching its lowest level since April 2021. In an interview with The Guardian, Bank of England (BoE) Governor Andrew Bailey suggested that the central bank could be a “bit more aggressive” in cutting interest rates. Elsewhere, according to a survey undertaken by the BoE, concerns over geopolitical risks have reached record levels among UK market participants, with 93% identifying geopolitics as the principal threat to the UK financial system.
UK growth set to pick up? The International Monetary Fund expects economic growth in the UK to “accelerate,” raising its forecast for 2024 from 0.7% to 1.1% as lower inflation and interest rates “stimulate domestic demand”. The UK economy grew by 0.2% during August following no growth in July or June. Growth was boosted by output in the manufacturing and construction sectors.
Dividend growth falls: according to Computershare’s Quarterly Dividend Monitor, headline dividends from UK listed companies fell by 8.1% to £25.6 billion during the third quarter, dampened by cuts in the mining sector, a strong pound, and lower one-off special dividends. On an underlying basis, dividends fell by 3.5% to £25.3 billion.
Global
US election nerves: uncertainty ahead of the US Presidential election weighed on share prices in the US and around the world during October. Major equity markets were choppy but generally fell over the month, although Japan bucked the trend, boosted by yen weakness.
Inflation under control? “The global battle against inflation has largely been won,” according to the International Monetary Fund (IMF), which upgraded its 2024 growth forecast for the US from 2.6% to 2.8%. France is tipped to expand by 1.1%, while Germany is set to stagnate. The IMF also warned that investors are too complacent about risks posed by possible geopolitical shocks to asset prices.
Growth in US: having grown by 3% year on year during the second quarter of 2024, the US economy expanded at an annualised rate of 2.8% during the third quarter, boosted by stronger consumer and government spending. Minutes from the FOMC’s September meeting showed that most policymakers were in favour of the 50 basis point cut but emphasised that the decision should not be construed as “evidence of a less favourable economic outlook”. Further monetary easing is widely expected; nevertheless, Fed officials appear to support a measured series of cuts in future. Although the Dow Jones Industrial Average Index hit seven new closing highs during October, it ended the month 1.3% lower.
ECB remains vigilant: the European Central Bank (ECB) cut its key interest rate by 25 basis points during October. ECB policymakers expect inflationary pressures to pick up in the coming months and then to ease in 2025. The annualised rate of inflation in the eurozone rose to 2% during October compared with September’s rate of 1.7%, dampening hopes of speedy monetary easing. Elsewhere, the eurozone’s economy expanded by 0.4% during the third quarter. Germany sidestepped recession, posting economic growth of 0.2% following its 0.3% contraction in the second quarter, and the Dax Index fell by 1.3% over the month.
Political upheaval in Japan: during October, the coalition led by Japan’s Prime Minister, Shigeru Ishiba, lost its majority. Although the ensuing uncertainty may undermine optimism in the longer term, investors welcomed a weaker yen and the possibility of slower monetary tightening. Despite political upheaval, Japanese equity indices ended October higher as the weaker yen boosted sentiment towards large exporting companies. The Nikkei 225 Index rose by 3.1% over the month.
As ever, if you have any questions regarding your investments, please do not hesitate to contact us by calling +44 (0) 7917 390 344 or emailing me at richardbrazier@culverfinancial.co.uk and we will be happy to talk to you.
Before Rachel Reeves, the first woman Chancellor stood up on 30 October 2024 to deliver the first Labour Budget for 14 years, we were all warned that there was a “black hole” in the public finances and difficult decisions would need to be made. There were many rumours swirling around and so many leaks that the Speaker became angry with the announcements being made before they were raised in Parliament. There were a few surprises but most of the big news stories had been leaked. In many ways, particularly from a Pensions perspective, the Budget can probably be deemed to be not as bad as feared.
Pensions
There were many rumours prior to the budget regarding restrictions on tax free cash sums and on relief granted on pension contributions. However, the actual position is:
Annual Allowance
The annual allowance is the maximum amount of contribution that you can receive tax relief on in any given tax year. With effect from the 2023/24 tax year this rose to £60,000 from £40,000 and no changes to this have been introduced. Similarly, the ability to use carry forward so that relief not used in the previous 3 tax years can be utilised will continue.
Tax free cash sum
The Budget did not introduce any changes to the rules regarding the amount that can be taken from pension arrangements in the form of a tax-free cash sum. Those who have started the process to withdraw their tax-free cash sum due to the rumours this could be restricted in future may wish to review their decision if the process has not been completed (but if it has been completed then this cannot be undone).
Tax Relief on Pension Contributions
The rumoured demise of tax relief at an individual’s highest marginal rate did not feature so the position remains as before the budget. This means that the tax planning opportunities for those earning between £100,000 and £125,140 remain as relief is effectively at 60% as for earnings between these limits you lose £1 of personal allowance for every £2 of income earned. Similarly for those eligible for Child Benefit there is a similar consideration when earnings are between £60,000 and £80,000. The potential for High Income Child Benefit Charge (HICBC) to be based on household income has been scrapped. Employed individuals will however be able to pay their HICBC through their tax code from 2025.
Pension Funds and Inheritance Tax
The big change for Pension arrangements is that going forward, any funds remaining in pension arrangements at death will form part of the estate for Inheritance Tax purposes. Currently as long as the death benefits are distributed at the discretion of the Trustees, the payment can be made without the delays of probate and without forming part of the individual’s estate. The ability to use pension funds as part of intergenerational wealth transfer will be severely impacted by this.
The intention is for there to be a new HMRC tool which will help work out how the nil rate band is distributed between the deceased’s assets. There is a consultation running until 22 January 2025 regarding the details of how this will all work in practice and the changes will not come into force until 6 April 2027. It seems inevitable that the role of Executors will become rather more complex as a result of these changes and a need for the processes to be streamlined if everything is to be achieved within 6 months of death.
State Pension
No change has been made regarding the triple lock so State Pension will continue to increase by the higher of inflation measured by CPI, average increase in wages or 2.5%. Currently there are also no changes to the already in place provisions for increasing State Pension age which is now 66 for men and women born between 6 October 1954 and 5 April 1960 and then for those born later gradually increasing to age 67 by 2028 and 68 by 2046.
Overall, with all the pension changes and the freezing of allowances, many will need to review their retirement planning to take advantage of the tax reliefs available in respect of pension funding. For those whose only income is the State Pension it remains to be seen what is proposed as with State Pensions increasing and income tax thresholds frozen, in theory the State Pension will become taxable, but this would create significant administration for little gain.
Transferring Pensions overseas
When the Lifetime Allowance was abolished an Overseas Transfer Allowance was introduced. Any payments above this limit were subject to an Overseas Transfer Charge (OTC). If the funds were transferred to a QROPS inside the EEA and Gibraltar, but the member remained a UK resident, there was an exemption from this charge. With effect from 30 October 2024, this exemption no longer applies so any transfer will be subject to 25% OTC on the total amount transferred
ISAs
There are no changes to the current subscription limits, so these remain £20,000 for ISAs, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs. These levels are to remain fixed until 5 April 2030.
A rumoured cap on accumulated ISA funds did not materialise.
Income Tax thresholds
The Autumn 2022 budget introduced the freezing of the personal allowance and higher rate tax thresholds at £12,570 and £50,270 until 5 April 2028 with the 45% Additional Rate applying on income above £125,140. Despite the rumours that the period for this freeze would be extended, instead the Chancellor stated that the thresholds would rise in line with CPI once again when the freeze ends.
Savings Allowance and Capital Gains tax
The Personal Savings allowance will be maintained at current levels so £1,000 for those with adjusted net income of £50,270 and below, £500 for those with adjusted net income between £50,270 and £125,140, and drop to £0 for those with adjusted net income over £125,140. The nil rate for dividend income will remain at £500.
As expected, the rates of Capital Gains tax have increased with effect from 30 October 2024. For basic rate taxpayers it will rise from 10% to 18% and for higher and additional rate taxpayers will rise from 20% to 24%. This means the rates are now in line with the rates which apply to residential property which remain unchanged.
Business Asset Disposal Relief
This relief provides a special rate of Capital Gains Tax on the disposal of business assets. A lifetime cap of £1,000,000 is to be applied. The special rate is currently 10% but this will rise to 14% from 6 April 2025 and to 18% from 6 April 2026.
Inheritance Tax
This budget made no changes to the thresholds for Inheritance Tax (IHT) so these remain at current levels, but these levels will now be frozen until 5 April 2030. The nil rate band will remain at £325,000 with the residential nil rate band remaining at £175,000. The nil rate band has remained the same since the 2009/10 tax year so has reduced significantly in real terms. This was once deemed as a tax that only applied to the wealthy, but more and more people are being drawn into the IHT net. This will be even more the case going forward as accumulated funds in pension arrangements are included in assets taken into account.
Agricultural Property Relief and Business Property Relief
The budget has introduced a restriction on the relief available although this change will not take effect until 6 April 2026. After this date only the first £1 million of the combined value of agricultural and business property will receive 100% relief. Any qualifying assets over this value will receive 50% relief so currently a tax charge of 20% rather than 40%.
These reliefs will also apply to shares not listed on recognised stock market but investments in AIM listed shares will qualify for 100% relief up to 6 April 2026 but only 50% relief thereafter.
Tax for non-UK domiciles
With effect from 6 April 2025, the concept of domicile will disappear for tax purposes and the focus will be on residence. Individuals who become UK resident, having been non-resident for more than 10 years will not pay UK tax on foreign income and gains for the first four years of UK residence, but will pay UK tax on their UK income and gains in the usual way.
From 6 April 2025, IHT will apply on worldwide assets when someone is deemed to be a long-term resident, which typically means they have been resident in the UK for more than 10 years out of the last 20 years. Someone leaving the UK will remain subject to IHT for the 10 years after leaving.
Corporation Tax
The Chancellor has committed to keeping the current rates of Corporation Tax and following the budget the Government has published a Corporation Tax Roadmap. This has committed them to
- Cap the Corporation Tax Rate at 25%
- Maintain the Small Profits Rate (19%) and marginal relief at current rates and thresholds
- Maintain key features such as Annual Investment Allowance and Research and Development relief rates
Employers National Insurance Contribution
The change to Employer National Insurance contributions was not a surprise as this had been widely commented on before the Budget speech. This represents the biggest contributor in terms of additional revenue raised and a significant additional cost on Employers.
The Employer National Insurance contribution rate has increased from 13.8% to 15% but in addition the Secondary Threshold, which marks the level of salary when this starts to be paid has been reduced from £9,100 to £5,000.
Changes have also been made to the Employment Allowance which enabled employers with a total National Insurance bill of £100,000 or less to deduct £5,000 from their NI bill. With effect from 6th April 2025 the allowance has been increased to £10,500.
It is anticipated that these amendments will raise £25 billion although concerns have been expressed that it will be less than this as employers may seek to reduce their workforce and going forward put off pay increases or offer lower pay increases. With employers looking at various ways to offset these additional costs, those who currently pass on some of the NI savings when pension contributions are paid by way of salary exchange may consider retaining all of their savings or may look at savings on other employee benefits.
At least the rumour that NI contributions would also be levied on employer pension contributions turned out to be false.
The pension industry was keen to see increases in the required contributions to workplace pension arrangements as it is widely acknowledged that the current 8% in total contributions is not sufficient to generate good retirement benefits. But it is now considered unlikely that there will be any increase in employer contributions for a while.
Increase in National Minimum Wage
An increase in the National Living Wage of 6.7% with effect from 6 April 2025 from the current level of £11.44 per hour to £12.21 per hour was announced which will place further pressure on some employers.
Child Trust Funds
A Child Trust Fund is a long-term tax-free savings account for children born between 1 September 2002 and 2 January 2011 which then closed. However, up to £9,000 a year can be added to an existing account and it was confirmed that this level of subscription can be maintained up to 5 April 2030.
Stamp Duty Land Tax
With effect from 31 October 2024, the Higher Rates for Additional Dwellings surcharge on Stamp Duty Land Tax (SDLT) will rise from 3% to 5%. The single rate of SDLT charged on the purchase of dwellings costing more than £500,000 by corporate bodies has also increased from 15% to 17%. This represents an increase in tax for those purchasing second homes, but to let residential properties and companies buying residential properties
EIS and VCT
The favourable income tax and capital gains tax that applies to these schemes has been extended to 6 April 2035.
Tax Administration
The move to making tax digital will continue with this being extended to sole traders and landlords with income over £20,000 although the precise timing of this is yet to be confirmed. Late payment interest on unpaid tax liabilities will rise from 7.5% to 9% with effect from 6 April 2025. The reporting of P11d benefits via payroll software will become mandatory from April 2026.
Overall, a budget that has delivered significant tax increases, although in some areas not as bad as was feared, but also a significant increase in spending such that despite the additional tax revenue, borrowing will also increase. Indeed, the Office of Budget Responsibility has stated that “this budget delivers a large, sustained increase in spending taxation and borrowing”.
It should be noted that none of the budget changes are law until the Finance Act receives Royal Assent.
Robert J Young
Director & Consulting Actuary October 2024
