The new Chancellor has unveiled Labour's first Budget since 2010, and it's been dubbed "the most important fiscal event in 15 years." With ambitious investment plans and £40bn in tax rises, the government aims to tackle the public financial 'black hole' and boost public services, especially the NHS. And also, with a bit of luck, boost the UK’s productivity and growth by making infrastructure investments.
Judging by the comments, crying, tantrums coming from ‘entrepreneurs’, and those considered wealthier, there have been absolutely massive tax increases. And sure, some are! But, when the dust settles, there will come to light things that can be done to reduce the burden and make things a lot more palatable.
"If you can meet with Triumph and Disaster, And treat those two imposters just the same, A lot less stressed you will be, when not looking for someone to blame"
(Kipling, 1895 & Rowe, November 2024)
So, for anyone crying in their milk about this, lets just accept this and do things that are more likely to make things much better anyway.
Tax is just a bi-product of earning money, so let’s take a look at how to end up with more, despite tax increases.
How to calm ourselves by viewing money differently.
The actual Budget changes and what can be done when we know the new rules.(spoiler alert, we don’t yet! Neither do the government!)
Firstly, here are the key changes that will most likely affect Lucent’s clients, that’s you, Dear Reader!
Key Changes:
Inheritance Tax (IHT) on Pension Death Benefits: From April 2027, inherited pensions will be subject to IHT. This means that when someone inherits a pension, it will now be considered part of the estate and taxed accordingly. This change is significant as it alters the way pensions are treated for inheritance purposes, potentially impacting many clients' estate planning strategies.
Inheritance Tax (IHT) reliefs cut on:
AIM Shares reducing from 100% to only 50%.
An allowance of £1 million introduced on Business Property and Agricultural relief at 100% with the rest being subject to inheritance tax but at a discounted rate of only 50% relief.
Employer NICs: Employers' National Insurance Contributions (NICs) will rise by 1.2% from April 2025, increasing from 13.8% to 15%. Additionally, the threshold at which employers start paying NICs will drop from £9,100 to £5,000. This change will affect businesses' payroll costs, meaning those business owners amongst us will face increased costs.
Capital Gains Tax (CGT): The rates for Capital Gains Tax will increase to 18% and 24% from October 2024. This change affects the tax paid on the profit made from selling assets like property or shares. The government aims to raise revenue while keeping the UK tax system competitive internationally. Business owners will need to adjust to these new rates, especially those benefiting from Business Asset Disposal Relief (BADR) and Investors’ Relief (IR), which will see phased increases to 14% in April 2025 and 18% in April 2026.
Stamp Duty Land Tax: The surcharge for second homes will increase by 2% to 5% from October 31, 2024. This change is designed to support first-time and main home buyers by giving them a comparative advantage over those purchasing additional properties. The government expects this to result in 130,000 additional transactions over the next five years.
What didn’t happen:
While some feared changes didn't materialize like:
Cuts to pension tax-free lump sums – you can still get £268,275 from your pension tax free.
Annual Allowance – you can still pay £60,000 into a pension each year and get tax relief at your marginal rate (45%/40%/20%) and use to help retain your personal allowance.
There are still significant updates that will impact both advisers and clients. But fear not! Lucent Financial Planning is here to navigate these changes and ensure your financial future remains bright.
At Lucent, we understand that these changes might seem daunting, but we're here to help you make sense of it all. Our team of experts is ready to assist you in re-evaluating your financial strategies and ensuring that you remain on track to achieve your goals. Whether it's adjusting your estate planning in light of the new IHT rules or helping your business manage the increased NICs, we've got you covered.
Mind Management:
We are not of the ilk of “woe is me” we are ones to dust ourselves off and get on to make things better! In my mind, I have no influence over the tax types or levels unless I want to become a politician and I can’t do that, I swear too much! So, we have to put up with it, but I don’t get upset because I think like this:
I think, money is a river. It all starts at the Bank of England where it is printed, then I am able to earn it. When I earn it, I pay income tax. Then, when I spend it, I pay VAT and other duties such as on Beer (1p a pint cheaper now!) or Petrol (get an electric car!) when I spend it.
All the time, I am trying to stop that money running past me, and get it on shore for a short while, so I can spend it later. But this is subjects it to tax too, in more income tax and capital gains tax.
But, the longer I can keep it, the more I can save for later to enjoy the exciting white water ride down the river to where all my money is lost off the huge waterfall of death. Just before that, the Treasury will take 40% of it in inheritance tax.
Here is an AI produced image that kind of illustrates it, but not brilliantly, and I can’t draw so we are going to be happy with it! OK? Good…
"You know, you start from nothing, you go out with nothing, what have you lost? Nothing!"
(Eric Idle, Always look on the Bright Side of Life)
I hope that’s put you at ease!
So what can we do about it? As Inheritance Tax seems to be the major increase here, let’s tackle that first. The introduction of pensions into the Estate for Inheritance tax is something that is being ‘consulted on’ and we won’t know those rules for a while. But, also, inheritance tax won’t apply until 2027 so we have plenty of time to work this out when the rules for come out.
Pensions are currently taxed in the following way on death, this applies only to ‘Defined Contribution’ schemes with defined benefit pensions schemes dying when you die.
Pre 75 – no tax applied at all.
Post 75 – the money is taxed on the income tax rate of the person receiving it (this is the same as if you draw it out).
Many will think that applying inheritance tax charge to it is double taxation. But it isn’t. when the money was paid into the pension, tax relief was granted. So that money has never been taxed. If you hadn’t paid it into a pension, you would have immediately paid tax on it. You would have lost the tax free growth on the investments within the pension and you would not have benefitted from the compounded growth on the tax you would have paid to begin with.
It seems the new rules (not yet finalised) will work like this. When you die, with say £500k in a pension, then this will be added to your estate. Assuming you already had inheritance tax you pay, then 40% of £500k would be payable by the pension. This would be £200k. You then end up with £300,000 that would be left as an inherited pension to your beneficiaries. If you died when over 75, then they would pay tax on it at their income tax rate. They can withdraw slowly so they only have to pay the tax when they take it. If you died before age 75 – then no further tax at all.
What is interesting is whether inheritance tax due from other parts of the estate could be drawn from the pension, I assume not as the Treasury will lose out then, but it will be interesting to see.
None of this will matter if left to the spouse as all that money is fully exempt under inheritance tax anyway.
What can be done with pensions:
It seems that it may be beneficial to draw an income from pensions now, where previously we would not have as were IHT exempt. Taking a total income of up to £50,000 will mean you are withdrawing at 20% income tax. If your beneficiaries are likely to have to pay 40% tax, then this would be a win. The downside is you lose the tax that is paid instantly and so it is not earning you money instantly. It could then be put into ISA’s etc to grow tax free, but not building up future gains that would be taxed at income tax. So, you might do this from age 75. (Remember, if you die before then, your beneficiaries would only pay inheritance tax, no income tax).
This is something that would take careful planning to determined which is best for you.
Draining money from pension would then mean you are able to use it to help reduce inheritance tax. Here are some options we would consider:
Firstly, for god sake, spend your money so that you can spend more time with the people you love and doing fabulous fun filled things.
Or
Spare income could be paid into trust or to a beneficiary under ‘gift out of regular income/expenditure’ exemptions, This is immediately exempt from inheritance tax.
Or
Gift to charity! This is free from inheritance tax. You could even set up your own Charity and gift large sums to that.
Or
Gift to kids to use their pension allowances. You pay income tax on withdrawal, they get it back when they pay into their pension and also build up tax free cash allowance. This is especially good if they are higher rate tax payers.
Or
Use to fund VCTs – these are high risk investments but get a 30% income tax refund thus helping to potentially reduce your income tax bill to nil. They would still have inheritance tax applied, but it removed the build-up of future income tax liability in pensions.
Or
Buy whole of life insurance and gift to trust – this would pay a lump sum on death to pay the inheritance tax bill. This is the simplest way of dealing with it.
Or
Regular gift exemptions – everyone is allowed to give £3,000 a year and that is immediately exempt from inheritance tax.
Or
Standard investments in ISA’s don’t reduce inheritance tax, but they so take growth that would be charged income tax as well out of the pensions. Similarly, General Investments accounts would have CGT applied, but this dies with you and converted to Inheritance tax.
Or
Use BR plans if not got the £1mill in form of other business etc. But they will have lower growth than standard stock market investments.
I could go on and on. The truth is, that a combination of these things is likely to be best. What combination will depend upon your individual circumstances and so you will need to be taking some details planning into consideration.
Should you still invest in Pensions:
Absolutely! The tax-free sum, tax free growth and tax relief at highest rate on entry, and potentially a lower rate on coming out of the pension, means they are likely to still be the most tax efficient part of your investments.
Still the best, it’s just not as good as before.
Capital Gains Tax:
These rates have been increased to 18% and 24%. In the past they were 18% and 28% so they are not massively increased and still likely the lowest rates of tax you’ll pay. As the way they are calculated effectively taxes inflationary increases, you need to make sure you are using your Annual Exemption allowance of £3k per year and investing in ISA’s too.
The use of onshore and offshore bonds should also be considered. These are based on life insurance and give great control over taxation and when it is paid. If your income tax rate is likely to reduce in retirement, then they will likely be very beneficial.
Business Owners:
With Business Relief being reduced in inheritance tax, if your business is worth over £1m to 50%, then you will need to consider who this is left to should you die. Your spouse would still get 100% exemption.
Extracting money from the business should still be done tax efficiently as possible, with maximising your pension payments to yourself to reduce Corporation Tax being one.
Getting your pension payments to employees to be done by Salary Sacrifice will save both Employer national insurance at 15% and employee national Insurance too. If you haven’t done this yet, make sure you do.
Stamp Duty on 2nd Homes:
If you are keen to get a holiday home, this will obviously affect you. But if it’s your dream, an extra cost should not stop it.
If you want to become a landlord, then this obviously makes it even more prohibitive to be a landlord. Taxation and the work involved on being a property investor are making it less and less attractive and you should seriously consider alternative options.
Earn more but pay more tax:
We talk, almost incessantly, howe the amount of money you have invested in equities of the great companies of the world will have the biggest factor on determining how much you will be wort in future. Just a 10% higher allocation means you are more likely to earn around 0.5% a year more in returns on average. The following year, another 0.5% on the 0.5% you earned extra the year before. This compounding really adds up over time. If you moved your portfolio from 60% to 80% in equities that is 1% a year. Over ten years on £500k a 1% higher return equates to £52k more.
Let the great companies of the world earn the extra inheritance tax costs for you… plus have a little more for yourself. Of course, returns are not guaranteed and we don’t know when the benefits will come. But history, our only guide, shows that they do come in the end, in a portfolio of every company big enough to invest in.
The Future is Exciting:
I have to say… I love this! I am at my best working out different ways of doing things and here at Lucent, we are primed to help you in this more complicated world of taxation and investing. We enjoy and get excited about the puzzle of taking the complicated to the simple.
Previously, it was relatively simple, but now the landscape is a lot harder, more nuanced and complicated. But this is our specialism and once the new rules come out, we will be ready to do what we do best. Which is, understand you, what you are trying to achieve and do it in the most tax efficient, wealth enhancing ways.
All so you can live the best, most exciting life, whatever it throws at you. Believe me, there will be a lot harder to come in terms of health challenges, loss of loved ones and last second missed drop goals against the All Blacks, than some poxy budget that we cannot control. So, lets enjoy it while we can.
We will be there with you. Bon Chance!
This article does not constitute financial advice. We recommend that you speak to a qualified financial adviser for advice tailored to your individual circumstances and goals. Financial markets may go up or down, and you are not guaranteed a return on your investment. Past performance is not necessarily a guide to future performance.
About the author
Steve Rowe is the CEO and Founder of Lucent Financial Planning, an award-winning provider of financial services to individuals and business owners in the Midlands region. We want to be the Financial Advisers that change your life, not just the financial adviser that changes your ISA.
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