Advisers have reacted to yesterday’s Budget by saying while it was tamer than expected, they anticipate it to have a big impact on estate planning and to be painful for investors and businesses.
The announcements unveiled by chancellor Rachel Reeves yesterday include an increase on the higher rate of capital gains tax to 24 per cent, an increase to stamp duty land tax to 5 per cent and the unfreezing of national and income tax thresholds.
The government said it was also removing the opportunity for individuals to use pensions as a vehicle for inheritance tax planning by bringing unspent pots into the scope of inheritance tax from April 2027, which is expected to affect around 8 per cent of estates each year.
Pensions and IHT
Bringing pensions into inheritance tax from April 2027 means that the proportion of estates subject to IHT will grow from the current 6 per cent, the government said.
Gary Smith, financial planning partner and retirement specialist at wealth management firm Evelyn Partners, said that as defined contribution pension funds could now be subject to up to 40 per cent IHT on death, he expected to see greater withdrawals from pension pots.
Smith added: “Pensions have been one of the most tax-efficient investments available to savers, with tax relief on personal contributions, tax-free growth and pension funds remaining outside of your estate for IHT on death.
“That means some retirees have prioritised using other savings and assets to fund retirement before their pensions. Retirees and savers have 18 months to review their long-term plans.
"Pension withdrawals are subject to income tax, so some savers in drawdown will have an eye on the frozen £50,270 threshold at which point their overall income from all sources will be taxed at 40 per cent.”
Speaking in reaction to the Budget, Philip Dragoumis, director and owner of Thera Wealth Management, said: “The devil is in the details, however, If you read and believed the Telegraph over the past month or so, Labour was about to introduce communism by seizing our property..and our first born.
“It's been a much tamer budget than expected. CGT was not raised to income tax levels, there were no changes on pension tax-free cash, lifetime allowances or annual allowances.
“There have been some welcome interventions in IHT loopholes on business relief, but still allowing zero rate on up to £1mn of investment. IHT on Pensions will change drawdown planning, but this was inevitable. All in all, quite happy given the circumstances.”
CGT hike
The Budget will also increase the lower rate of CGT from 10 per cent to 18 per cent and the higher rate from 20 per cent to 24 per cent.
While the CGT hike was not as high as feared, Anita Wright, an independent financial adviser at Bolton James, said it would significantly impact investors because investors would retain less of their profits when selling appreciated assets.
“For example, a gain of £10,000 previously taxed at 10 per cent would incur £1,000 in CGT; under the new rate of 18 per cent, the tax due would rise to £1,800,” Wright added.
