The first Labour Budget in 14 years was announced on October 30th, 2024. First though, we must bear in mind that this is only the first Budget of the new Labour government, and there will likely be more changes that follow. For now, we are merely responding to what came out of Wednesday’s announcement, and for some of those changes there is still legislation and detail that needs confirming, which will come to light in the months to follow.
(If you would prefer to watch a Q&A video session with our Chartered Financial Planners, please see below this blog)
Key Labour Budget Changes Affecting Your Wealth:
1. Capital Gains Tax (CGT) changes had been predicted in recent weeks, and the changes to the CGT regime are as follows:
-
- Basic Rate CGT: Increased from 10% to 18%
- Higher Rate CGT: Increased from 20% to 24%
(Please note these increases take immediate effect, and therefore could have a significant impact on investments that you may hold outside of the tax-efficient SIPP, ISA or Bond wrappers.)
2. Inheritance Tax on Pensions Starting 2027. Changes could be very painful for some, as your pension will now form part of your estate and be liable to Inheritance Tax, from 2027.
What Can You Do About The Changes Following The Budget?
1. Capital Gains Tax
On the CGT issue, there are a few things to consider in the immediate term:
- Have you utilised your £20,000 ISA allowance in the current tax year? It’s an easy way to get your money in a tax-free environment.
- Have you made the most of the interspousal gifting rules to offset your gains or losses?
- Have you used your children/grandchildren’s allowances? Junior ISAs have an annual allowance of £9,000, and Junior SIPPs £3,600.
- The use of onshore and offshore bonds will be significant moving forwards, and we will send you information separately on this as there is much more detail to share.
2. Pensions
When it comes to the pension being bought into your estate, we will need to see the detail on this when it is finalised in January 2025. As a starting point, these are some of the things to consider:
- Your pension can still be passed to your surviving spouse tax-free.
- Gifting will become an increasingly popular method to reduce the IHT liability. Regularly gifting out of your income has no limits, but it only works if it’s a regular payment and doesn’t give you a poorer standard of living, whilst also ensuring you will have enough money to live on for the rest of your retirement.
- Instead of gifting, some may prefer to take money out of their pension and pay the income tax in order to place it into a tax-free ISA wrapper, for example. Though this would only really work if you are a basic rate tax payer now, and expect to be pushed into the higher rate in the future. (Note: you should only be withdrawing money from your pension if you can subsequently remove it from your estate – spend it, gift it, pay into an ISA. Otherwise you risk paying income tax on the withdrawal, plus an additional 40% if you die and it’s still within your estate.)
- Reviewing your will is going to be key. Currently, you have to complete an Expression of Wish or Nomination Form for your private pension. This indicates who you want to inherit your pension when you die, as it cannot be written into your will. With the new changes, we assume this will mean you need to update your will, and these Expression of Wish Forms may become redundant. However, as Self-Invested Personal Pensions (SIPPs) are written under trust, and therefore still under control of the trustees, this will be one we hope to get further clarity on in the coming months. Pension reforms are never straightforward!
But it’s not all bad news, and there was plenty being rumored prior to the Budget which fortunately hasn’t come to fruition. ISA allowances, tax-relief on pension contributions, and the tax-free pension lump sum are just a few of the things that have remained unchanged for now.
It’s worth remembering that the other aspect that hasn’t yet changed is the tax treatment on pensions whether you die before or after the age of 75.
Death pre-75 still means the pension can be accessed by beneficiaries free of income tax. Likewise, death after age 75 will still mean that beneficiaries access the pension and be liable to income tax at their own marginal rate. The key difference from 2027 will be that regardless of age upon death, the pension will be assessed for IHT liability. This could result in your beneficiaries paying 40% IHT, plus income tax when they take benefits, if you die after the age of 75.
Plan for the future with Dennehy Wealth. There is a lot to uncover, and the future use of bonds and the likes of AIM ISAs, for example, are going to be aspects of your financial plan that come up in conversation with your adviser in the near future. Some of these alternative products are not suitable for everyone, and therefore it shouldn’t be assumed that this is the best solution without seeking financial advice first.
If you are not a client of Dennehy Wealth, and would like to adjust your financial plan post-Budget or understand how the changes could impact you, speak with one of our Chartered Financial Planners. You can book a free initial consultation here, choosing a date and time that best suits you.
