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Over the last 48 hours, we have all seen the headlines from Wednesday’s Autumn Budget delivered by Rachel Reeves. In this article, we dig a little deeper into some of the key areas that may affect you and what action you could take.
Pensions
What do we know?
At first glance, pensions escaped lightly with no changes to tax relief or current tax-free cash rules.
However, the announced changes to the inheritance tax (IHT) treatment of pensions from April 2027 could be significant to many of our clients. A technical consultation is taking place and the government will publish further details in 2025.
Simple Case Study
Age 70, no spouse
Defined Contribution Pension £700,000
Rest of Estate £800,000
This means an additional £280,000 of inheritance tax under the new rules. The Nil Rate Band (IHT tax free allowance) will be apportioned across the estate, meaning £219,333 will be due from the pension fund before distribution and £250,667 from the remainder of the estate.
How does this affect me?
I am under the age of 75 and have not touched my defined contribution pension as I don’t need the income.
You need to include your pension funds as part of your income planning and inheritance tax planning strategies, especially on second death if married. This could include taking the tax-free cash to, for example, make gifts. And whilst potentially subject to IHT, your beneficiaries will still receive the inherited pension funds free from income tax.
I am under the age of 75, have taken the tax-free cash and take a regular income from my pension.
You may need to review the level of income you take and whether it needs to be adjusted in the context of your other assets. You may wish to consider further gifting.
I am over the age of 75 and have sizeable pension funds that I have left untouched as part of my IHT planning.
Your pension funds may be subject to inheritance tax at 40% and it then appears your beneficiaries will pay income tax at their marginal rate of tax on the remaining funds paid out to them. If your beneficiaries are additional rate 45% tax payers, this results in an overall effective tax rate of 67%. You may need to consider your overall IHT planning including the use of gifting and/or taking out a life assurance policy to cover any additional inheritance tax liability.
Conclusion
Pensions remain a tax-efficient way to save for your retirement as part of your overall financial planning strategy. However, they can no longer be thought of in isolation or used as an inheritance tax planning tool.
The financial planning in this area is very much bespoke, and should be based on your individual circumstances and objectives. This is a significant change and most clients will need to review their overall strategy.
Inheritance Tax (IHT) Planning
What do we know?
The IHT thresholds remain fixed at their current levels until April 2030:
- Nil-rate band at £325,000
- Residence nil-rate band at £175,000
- Residence nil-rate band taper, starting at £2 million
From 6 April 2026, the first £1 million of combined business and agricultural assets will continue to attract no IHT at all. For assets over this threshold, IHT will apply with 50% relief meaning an effective IHT rate of 20%. The cap will also apply to Trusts holding assets which qualify for business relief (BR) and/or agricultural relief (AR).
Also coming in effect from 6 April 2026, AIM shares will now receive 50% relief from IHT uncapped (effective IHT rate of 20%)
Changes will be made to the IHT regime based on a new residence-based system from April 2025.
How does this affect me?
You have a family business, valued at over £1m, that is currently 100% protected from IHT.
From April 2026, the first £1m will be free from IHT, thereafter an effective IHT rate of 20% will apply. So, for a business valued at £3m, that could mean an IHT liability of £400,000. You will need to review your existing strategy for intergenerational wealth transfer and review your future succession strategies.
You have previously established a Trust and are thinking about setting up another Trust.
Trusts already established which hold assets that qualify for BR and/or AR will continue to qualify for 100% relief on assets up to £1m. For trusts set up by the same person on or after the 24 October 2024, the government intends to introduce rules to ensure this allowance is divided among the trusts. You may need to consider alternative options and review your succession planning.
You hold an AIM portfolio as part of your IHT planning strategy.
You may need to review your overall strategy and reasons for holding an AIM portfolio. Although no longer exempt from IHT if held for at least 2 years, with an effective tax rate of 20% rather than 40%, AIM stocks may still pay an important role in your overall financial planning.
You plan to move and live abroad when you retire.
From 6 April 2025, if you leave the UK, there will be a ten-year tail of IHT exposure. For those that plan to leave by April 2025, they will be subject to a 3-year IHT tail. Domicile will no longer have any relevance.
Capital Gains Tax
What do we know?
Speculation around substantial increases to capital gains tax (CGT) was rife, but the reality was essentially an equalisation with the rates charged on residential property. So, for a basic rate tax payer CGT moves from 10% to 18% and for a higher rate tax payer from 20% to 24%. This was effective from October 30th.
Business Asset Disposal Relief (BADR) remains in place, giving a 10% rate of tax for now on lifetime gains of up to £1m. However, the applicable rate of CGT will increase to 14% from 6 April 2025, and further to 18% from April 2026.
The CGT rate for Investors’ Relief, which applies in similar circumstances to BADR but where the investor is unconnected with the business, will increase in parallel with the BADR rates. The lifetime limit for the relief will also reduce from £10 million to £1 million for disposals made on or after 30 October 2024, significantly limiting its financial benefit going forward.
How does this affect me?
For those with non-residential property investments with taxable gains, the rate has increased, but the deadline has passed and so there is no action to be taken for tax mitigation purposes.
Those business owners considering sales will benefit from disposing before the end of this tax year, but whether the change in tax rate is sufficiently material to warrant adjusting the timing of a sale given the myriad of drivers in that decision, is another matter.
Summary
A number of significant changes have been announced. It is important to take financial advice and to remember that any action should be based on your individual circumstances. If you would like to talk to us about your options, please get in touch with your Relationship Manager or either Anne (amcclean@ipscap.com) or Lucy (lchahil@ipscap.com) from our Wealth team.
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