This is a brief update following my note on the Budget last week.
Firstly, I need to correct a couple of errors in my earlier e-mail. I was in too much of a hurry to get something out to you. The Capital Gains Tax rate changes actually came into immediate effect. It is the staggered change to Business Asset Disposal Relief that begins at the start of the new Tax Year. I also said the CGT changes were expected to bring in £25 billion, when it should, of course, have read £2.5 billion.
However, the main reason for this update is to counsel caution regarding the changes to Inheritance Tax (IHT) and, in particular, the inclusion of private pensions in one’s estate for the purposes of calculating any IHT due.
If the rules change as proposed, the following situation could arise:
Assuming all IHT reliefs and exemptions have been covered by property and other assets, then the full value of an inherited pension will be subject to IHT at 40%. This means that a £100k inherited fund will net down to just £60k for one’s beneficiaries…..BUT it’s worse than that. When one’s beneficiaries want/need to access their net £60k inheritance, they will pay income tax at their marginal rate on any withdrawals. In the example above, this could mean up to another 45% tax hit if the beneficiaries wanted to take the money as a lump sum. The end result would be a net sum of just £33k from a £100k fund with £67k going to HMRC, an effective rate of 67%!
I have just been listening to an interview with Baroness Altman (an ex-pensions minister). She has expressed real concern that this could undermine confidence in the entire private pension system. People have made carefully considered decisions to build their pensions to provide for their old age, with anything left over being passed to their children. These people were not exploiting a loophole as Rachel Reeves would like us to believe; they were just being prudent and entirely within the rules.
I am cautioning against any knee-jerk reactions because the new changes do not come into effect until April 2027 and because there will be a consultation period in the meantime. I wonder if we might see a slight watering down of these proposals, maybe IHT being deducted but then no further income tax being due? This would give the Treasury funds when people die but would not unduly penalise people who have saved diligently for their retirement and their children’s future.
Many of you will be affected by this proposed change, but luckily, we have plenty of time to review your strategy with you and recommend any changes where appropriate.
As more details become available, I will write again.
I hope you found the above interesting. As always, if you have any questions about this piece or any other finance-related matter, please do not hesitate to contact me.
Yours sincerely,
Graham Ponting CFP Chartered MCSI
Managing Partner
