I am not sure how to describe the overall feeling in the office on what one colleague has described as ‘Budget Boxing Day’. In my 15 years in this profession, I have never known any financial or political event (Budget, Autumn Statement, Election etc) to cause this much rumour, speculation and in some cases, outright panic!
In one way yesterday was a huge relief – after a seemingly never-ending period between the election and the budget, we finally have some certainly about the future direction of travel for tax policy. Unfortunately, that is where the good news ends really.
Before I get into the detail, I would like to put on record my thanks to the Buckingham Gate team who have worked tirelessly over the past 3 months or so to get planning solutions in place for clients ahead of the budget day – I have never seen such dedication and determination and I am very grateful for all of their efforts!
This was a budget with very few giveaways indeed. Of course, the budget after a new government is elected tends to be the most painful with subsequent financial events getting gradually ‘sweeter’ leading up to the next election, however this one really was a doozy. To quote Chris Mason on the BBC:
There are the tax rises visible from near-earth orbit, the self imposed borrowing rules shredded and re-written – to allow more borrowing – and big wads of spending for the NHS, just for starters.
I lost track during the election campaign of how often Labour folk insisted they had “no plans” to put up taxes beyond a relatively narrow band of those they said would rise.
Looked at now you don’t have to be wildly uncharitable to conclude that was comprehensive baloney.
So, What Stays The Same?
So, looking now at the measures that will impact on client’s Estate Planning, it makes sense first to consider some of the things that didn’t change:
1. There were no changes to pension tax free cash entitlements as were widely rumoured and reported on by multiple outlets. I have always been of the view that this was unlikely, but it is nice to have confirmation.
The speculation on this measure alone caused almost unprecedented intervention from the government and the FCA given the volume of people taking out their tax-free sums in fear, potentially causing long-term damage to their financial plans in the process.
2. There were also no changes to pensions tax relief or the annual pension contribution allowances– again, speculation had been rife in this area.
3. We saw no changes to ISA allowances or the ISA system in general.
4. Perhaps most importantly, there were no changes to the main IHT exemptions such as the £3,000 annual gifting allowance, the £250 small gifts provision or the gifts out of regular income exemption. In the face of an otherwise tightening IHT net, these exemptions will become ever more valuable.
So What Is Changing?
With those items out of the way, let’s now consider some of the things that are changing that will have the largest impact on our estate planning:
Inheritance Tax Nil Rate Bands – Frozen Until 2030
We now know that the main Nil Rate Band and Residence Nil Rate Band allowances will remain frozen for a further 2 years up until 2030. Given that the main Nil Rate Band allowance of £325,000 first arrived at this level in 2009, it will mean that there will have been 2 decades with this allowance frozen.
To give an idea of how significant this is, £325,000 in 2009 would now be worth around £504,000 in 2024 according to the Bank of England and if we factor in 2.5% inflation for another 6 years or so, it should be worth around £585,000 come 2030!
As asset prices continue to rise, more and more families will be pulled into the grasp of IHT.
Capital Gains Tax Increases
Capital Gains Taxes were widely rumoured to increase and this is one where the crystal ball proved at least partly correct, although the rate of the increase was not nearly as bad as some had feared.
The main rates of CGT will increase from 10% and 20% to 18% and 24% respectively on shares and other asset sales to bring the rates in line with those charged on residential property sales (excluding the main residence).
Although this change will be unwelcome, CGT rates still remain comfortably below those of income tax, especially for higher or additional rate taxpayers.
This will be especially relevant for lifetime gifting plans as, generally a lifetime gift causes any gain on the asset gifted to crystalise. There are methods to minimise the impact, however in general, this may mean that people wish to start gifting sooner and over a longer period of time.
Business Relief & Agricultural Relief
Business Relief and Agricultural Relief have long been very valuable IHT reliefs for those who qualify and these have been retained in part, although the allowances have been cut significantly.
Whereas under the current system there is no limit on how much value can be passed using these reliefs, the rules will change to provide for a £1m cap on relief across both business and agricultural assets (after the £1m is passed, relief will then be restricted to 50%, meaning a effective rate of IHT of 20% on these assets) – farmers and small business owners will be especially unhappy with this move as is already being reported.
It was also announced that IHT relief would be restricted to 50% (meaning an effective 20% IHT rate) on AIM shares, however it seems that 100% relief will remain for other ‘unlisted, privately owned business assets’ up to the £1m cap.
While this move was not as bad as feared (many thought the relief would be scrapped completely), it will still be unwelcome and may be seen as a changing of the goalposts for those who have previously invested in these assets.
With this said, in an increasingly hostile IHT environment, these reliefs will still be incredibly valuable in the right circumstances.
The AIM market itself also seemed happy with the announcement that at least some tax relief would be retained – it rallied by some 4% on the news.
Pensions To Be Subject to IHT
Finally, we come to perhaps the largest measure, and certainly the most impactful from an IHT perspective – the fact that from April 2027, pension death benefits and unused funds will now form a part of the Inheritance Tax estate.
This is a return in part to the pre-2015 regime where we used to have a different ‘death tax’ on pension benefits.
My first thoughts on this are that it is once again a huge U-turn in pension legislation – in the pre-2015 world, pensions were arguably the most harshly taxed asset on death. In 2015, they became perhaps the most generously taxed – moving from one end of the spectrum right to the other in one move.
The proposals announced take us back to the other end of the spectrum once again. This does nothing to help with the usual criticism of the pensions system that “the Government keeps moving the goalposts”.
From a practical perspective, this will almost certainly require plans to be re-visited and in some cases will require a fundamental shift in thinking.
The changes are subject to consultation and are not due to come into effect until April 2027 and so in most cases no immediate action should be taken until we fully understand the implications and how the legislation will be implemented.
Things can and often do change during the consultation process (for example, the proposed ‘British ISA – BRISA’ was scrapped entirely in the budget because of a ‘mixed response’ to the consultation) so it will be best to wait until we at least have some legislation to look at before taking any drastic action.
Sadly, it seems that this change will be happening – the consultation document is not asking for input on whether or not it is a good idea – more around the technical aspects and the implementation – so the Government seems fairly committed to this course of action.
For those clients with Pension Preservation Trusts (we previously called these Asset Preservation Trusts) we will communicate separately, however as mentioned above, we have plenty of time before the new rules take effect and the current (very generous) rules remain in place until then.
The Buckingham Gate team have spent the last 24 hours or so unpicking the whole of the 160+ page budget document and the many (many) associated technical notes and consultation papers launched alongside it. We will continue with this work in the coming days because very often the devil is in the detail and there will be elements in the small print that did not make the budget speech (or even the budget document).
Rest assured that we will provide further updates as more information becomes available and we will be communicating with individual clients based on their own planning and circumstances.
In closing, I would urge people to now treat their Estate Planning with a sense of urgency (although not panic).
There were a couple of measures in the budget that took immediate effect (like the CGT changes for example) which we can now do nothing about, but most of the other measures are slated to be introduced at a future date which will be at least the April of 2025. This gives us a window of time to take advantage of the current rules and the exemptions that still apply – while we still can!
I think this budget gave many people a wake up call to ‘get on with it’ while the going is good – please make sure you take that lesson to heart!
