Expert Commentary: IHT, CGT and pension reform in the Autumn Budget

HMRC Tax Receipts and National insurance Contributions has been published this morning for September 2024. Takings for inheritance tax April 2024 to September 2024 are £4.3 billion, which is £0.4 billion higher than the same period last year

 
Paul Barham, Partner at Forvis Mazars commented: “Inheritance tax is the talk of the town with the number of estates paying IHT increasing over the years due to frozen thresholds and increasing asset prices. This has added to the Treasury’s finances and everyone is now wondering what’s next.

“Given the uncertainty over how the Government might look to change IHT legislation, and that IHT planning typically involves significant decisions, knee jerk reactions are not wise. Those families wary of potential changes, who are already planning, should make use of the allowances available under the current system.”
 

“IHT remains a glistening pot at the end of the rainbow for a Chancellor”

William Stevens, Head of Financial Planning and Partner at Killik & Co: “As we swiftly approach the new Labour government’s inaugural budget, IHT remains a glistening pot at the end of the rainbow for a Chancellor looking to bring in cash. Receipts continued to increase in September, with the latest figures showing HMRC has collected £406.3 million so far this tax year.”

“And this is only set to rise further in the years ahead if rumours of changes to Inheritance Tax are true. Regardless of what is announced, ensuring you and your family plan both suitably and early remains important, and trusted advisers are there for those looking to navigate the complexities.”

“inheritance tax will be in the Chancellor’s Budget crosshairs”

How three potential inheritance tax reforms could shape inheritance tax planning – by Rob Morgan

 
If rumours are to be believed, changes to the IHT regime will have a dramatic impact, increasing the need to plan well and plan early. 

Thanks to frozen nil-rate bands and asset price growth IHT receipts have been hitting record highs in recent years, soaring to £7.5bn in the 2023/24 tax year. This is set to rise in the current tax year too. Receipts from April 2024 to September 2024 are £4.3 billion, which is £0.4 billion higher than the same period last year.

Despite this, it seems inevitable inheritance tax (IHT) will be in the Chancellor’s Budget crosshairs given the extent of the government’s stated funding gap. With the ‘baby boomer’ accumulation of wealth increasingly being passed to the next generation inheritance tax rules are being closely examined.

While it’s doubtful the rate of inheritance tax will be increased – it’s already at a very high at 40% – the various exemptions and gifting rules used to mitigate, and in some cases eliminate, the tax will surely fall under the microscope.
 

A ten-year ‘clock’ for gifts would mean earlier planning is required

 
The Chancellor is reportedly considering extending the so-called ‘seven-year rule’ on gifting to ten years. At present, gifts are exempt from IHT after seven years have elapsed, and the value of gifts exceeding the nil rate band made three to seven years before death are tapered down.

For wealthy families it can be relatively straightforward to make lifetime gifts to children and others and still ensure the donors aren’t left short in old age. However, gifting is riskier for modestly affluent families who must weigh up tax considerations against the uncertain cost of later life. It is these people that stand to be hit hardest by an extension of the seven-year rule. By holding onto assets longer to maintain their self-sufficiency they could increase the tax burden for their heirs, a potentially unpleasant dilemma.

Any such move in the Budget would call for earlier IHT planning and extra thought around making earlier, larger transfers and use of gifting allowances, notably gifts out of ‘excess income’, assuming these are not also changed. At present, wealthy individuals can make unlimited gifts free of IHT if these are made on a regular basis and do not affect the giver’s standard of living, but meticulous record keeping is essential.
 

Reduction in nil rate bands would mean more estates caught in the IHT net

 
The first line of defence against IHT is the nil-rate band, including the residence nil-rate band. Under current rules (2024/25 tax year) an individual’s tax-free allowance is £325,000, with an additional £175,000 available to those leaving the family home to their children or grandchildren.

If you are married or in a civil partnership, your estate can pass inheritance tax free to your spouse on your death if this is your wish. This means the combined threshold for a couple can be as much as £1m. It is possible the Chancellor could reduce these bands in some way so that a smaller estate is caught.

This sort of move has the potential to increase revenue from IHT significantly, but it would mean many ordinary families, who would in no way consider themselves wealthy, are drawn into the tax net. A typical modest family house in the southeast already absorbs a considerable chunk of the combined £1m allowance as things stand, and a reduction to £800,000, say, would leave very little room for any other assets – particularly if pension funds are brought into the calculation too, which seems likely. A reduction to the headline nil-rate bands would therefore be hugely unpopular and is less likely than other reforms.
 

Curtailing IHT reliefs has the potential to upend the IHT playing field

 
The Chancellor has previously criticised what she regards as wealthy people using loopholes to avoid IHT. As such, it would hardly be a surprise is she were to scrutinise some of the major reliefs used extensively by land and business owners.

There is potentially 100% relief from IHT on many qualifying business and agricultural assets, including some AIM-listed shares, which have been owned by the transferor for at least two years. With no upper limit, business relief is used extensively by the wealthy to pass on large estates with relatively little tax. The Chancellor may target these reliefs by imposing thresholds or restrictions while preserving the core reason for their existence, the continuation of a small business or farm as it passes down the generations without it having to be dismantled for tax reasons.

However, it’s a fine line to tread if the Chancellor also wishes to support British businesses for growth. Curtailing business relief in a significant way is at odds with the government’s assertion that increasing private sector investment is a priority to boost the economy. Regarding AIM shares, any move to change their preferable IHT status would go against its previously supportive stance of the City as a vital part of the UK economy. It imperative that UK growth companies of all vintages are supported to help generate much-needed economic growth.
 
Rob Morgan is Chief Investment Analyst at Charles Stanley
 

Financial experts give further commentary on Pension Reform ahead of the Autumn Budget

 
Paul Clifton, Director, Wealth Planning at Arbuthnot Latham on pension reform pre-budget:
 

Autumn Budget – Pensions: What measures do you expect Rachel Reeves to announce?

 
Labour has already signalled its intent to review the pension system and one of the most talked about changes are potential adjustments to pension tax relief. While upfront tax relief depends on an individual’s tax position, most people receive relief at their highest marginal rate. For example, for an additional-rate taxpayer to make a £100 pension contribution, it effectively costs them just £55 of taxed income. One suggestion is the introduction of a flat-rate tax relief, possibly set at 25% or 30%.

Changes to the 25% tax-free lump sum along with the reintroduction of the lifetime allowance has also been widely discussed. It could happen, or they may change the rules for future pension contributions rather than existing pensions.

Another possibility is bringing pensions into the taxable estate for inheritance tax (IHT) purposes. Currently IHT does not apply to most pensions although, sometimes, the beneficiary does pay tax at their marginal rate on any monies withdrawn.
 

Who are they most likely to impact?

 
Changes to upfront tax relief could have a significant impact on higher and additional-rate taxpayers saving for retirement. If relief is reduced, wealthier individuals may find pension savings less tax efficient reducing the incentive for higher contributions.

Most people rely on the 25% tax-free lump sum to clear mortgages, support children or fund travel at the start of retirement for example. Currently, many retirees use pensions as the last asset to draw on due to IHT advantages. If these benefits are altered many individuals may need to reconsider how they manage their pension withdrawals and retirement planning.
 

Why do you think these measures will be announced?

 
Labour ruled out increasing Income Tax, National Insurance, or VAT before the general election, but with significant economic challenges, Prime Minister Keir Starmer and Chancellor Rachel Reeves have signalled that tough measures lie ahead.

Starmer’s remark that “those with the broadest shoulders should bear the heavier burden” suggests that wealthier individuals and businesses may face higher taxes as part of the government’s efforts to raise revenue and address fiscal imbalances. The introduction of a flat-rate tax relief could incentivise basic-rate taxpayers to save more while reducing the cost for the government overall.