Financial advisers reveal questions they're answering after the Budget
The dust is settling following Rachel Reeves' Budget last week and many are concerned about how new rules might affect them and their finances.
The main worries about the raft of changes announced by the Chancellor are hikes to capital gains tax and inclusion of pensions into estates for inheritance tax calculations, according to financial advisers.
The increase to capital gains tax, which came into effect immediately, saw the levy upped from 10 to 18 per cent for basic rate taxpayers, and from 20 per cent to 24 per cent for higher rate taxpayers.
Post Budget concerns: Financial advice clients are concerned about the effect on their financial situation
Meanwhile, the government also announced pensions would be included in the assets that count towards the 40 per cent inheritance tax rate, though this measure won't come into effect until April 2027.
This is Money spoke to financial advisers to find out what their clients are asking them following the Budget, how many of the changes are likely to affect you, and whether you need to act now to protect your money.
Canaccord's Samantha Gibson says an increasing number of people will face an IHT bill under the new rules
Pensions included in estates
Chief among the concerns of many is the news that pensions will be included in inheritance tax calculations.
Inheritance tax is levied at 40 per cent on estates above a certain size.
You need to be worth £325,000 if you are single, or £650,000 jointly if you are married or in a civil partnership, for your loved ones to have to stump up inheritance tax. This is known as the nil rate band.
But there is a further chunky allowance - the residence nil rate band - which increases the threshold to a joint £1million if you have a partner, own a property, and intend to leave money to your direct descendants.
Once an estate reaches £2million this own home allowance starts being removed by £1 for every £2 above this threshold. It vanishes completely by £2.3million
With pensions now forming part of this calculation, many more could find themselves above the allowances.
Samantha Gibson, senior wealth planner at Canaccord Wealth said: 'Where IHT only applied to around 6 per cent of the UK's estates at present, this move will drag many more people into the IHT bracket.
'One client asked if when he inherits his elderly father's pension, which is over £1million, as an additional rate taxpayer, will he have to pay 40 per cent IHT and then also pay 45 per cent income tax if he were to draw on it – so what could effectively be a 67 per cent tax.
'It sounds horrendous but early indications are that this could be the worst-case scenario.'
The tapering of the residence nil rate band down to nothing for estates worth £2.3million could also add to the inheritance tax due on the pension, meaning an effective tax rate of 70.5 per cent.
Cannaccord warns people should not change their pension behaviour because the changes won't take effect until 2027.
Echoing this, Ray Black, managing director of Money Minder, told This is Money: 'I've emphasised that although the IHT regime changes are forecasted, they haven't been implemented yet.'
Indeed, Quilter Cheviot says it expects tweaks to be made to the policy ahead of its implementation.
Should I be drawing from my pension now?
Previously, many with estates above the thresholds explained above would make use of their pensions in order to protect some of their wealth from inheritance tax.
They have chosen to use other assets to fund their retirement, and instead pass their pension on when they die.
David Gibb, chartered financial planner at Quilter Cheviot, said: 'Many clients were funding their pensions and taking advantage of the increased annual allowance and the abolition of the lifetime allowance to increase the funds in their pensions following the government's changes in legislation.
'We need to wait until the details come out, but annuities will most likely now be used in many planning and retirement strategies.
'Corporate clients who are not currently using salary sacrifice should consider this as a way to help mitigate the increased burden from the changes to employer National Insurance.'
Lisa Caplan, chartered financial planner at Charles Stanley, said one of her clients has been using his Isa funds in order to preserve his Sipp for inheritance tax purposes, but isn't sure if he should now be drawing from his Sipp.
Caplan said: 'It can make sense to take money from the Sipp, but while money taken from an Isa does not count for income tax, money taken from a Sipp after the 25 per cent tax free allowance will be taxed.
'So, I would suggest staying below the higher rate of tax which at 40 per cent is equal to inheritance tax.
'Pensions remain a tax shelter from income tax and capital gains tax while the money stays in the pension. This is a real benefit.'
She added: 'One possibility is to take his tax-free cash and gift it his children. It will escape the IHT net after seven years.
'Bringing this forward could be of greater benefit to his children now while they are younger and are still establishing themselves financially.'
> I'm 64 - should I move £20k a year from my pension into an Isa after inheritance tax raid in the Budget?
How do capital gains tax rises affect you?
Hikes to CGT proved one of the big-hitting policy changes announced in the Budget.
With rates equalised with the higher rates for those with second homes, more and more people will face considerable capital gains tax bills in coming months.
Unsurprisingly, it is a topic that financial advisers are increasingly finding themselves being asked about.
David Gibb of Quilter Cheviot told This is Money: 'As the capital gains tax increase was effective from the date of the budget, there are no real planning opportunities, although many clients did realise gains in advance of the Budget, which turned out to be very good planning.'
As a result of the CGT increase, Gibb says clients are now keen to find out where they need to put their money in order to be as tax-efficient as possible.
He said: 'With the increase in CGT and the recent decreases in the annual exemption amount, investment bonds are now more attractive for many investors than general investment accounts.
'Consequently, new investment money may well find its way to investment bonds as opposed to these unwrapped general investment accounts.'
What does the Budget mean for inflation?
While inheritance tax and capital gains tax are no doubt at the top of the minds of wealthier people, there are other potential outcomes from the Budget that aren't hitting the headlines.
Ray Black of Money Minder said: 'With the government's increased borrowing and higher public spending, there's a real risk of inflation rising in the near term.
'It's crucial, therefore, to maintain a diversified investment portfolio to safeguard against prolonged inflationary risks.'
According to Black, there is a risk of stagflation as a result of the potentially inflationary Budget in the short term.
He said: 'The Office for Budget Responsibility's forecast suggests that inflationary pressures could persist due to the Budget measures.
'High borrowing costs and global uncertainties like energy price fluctuations add to the risk of stagflation—where slow economic growth coexists with high inflation.
'Rachel Reeves's tax-raising measures, including the increase in employer National Insurance contributions and greater government borrowing, could drive up business costs and potentially limit wage growth and hiring while increasing consumer prices.'
Black said that while investors should ensure that their holdings are diversified, businesses need to ensure that they manage their costs effectively.
Ray Black warns that the budget could cause short-term inflation
A future for farmers?
With farms now liable for inheritance tax when they are worth over £1million, many farmers are concerned that their loved ones may struggle to afford the tax bill when they pass their farm on.
Inheritance tax calculations include machinery such as combine harvesters and tractors, some of which can be worth into the hundreds of thousands of pounds.
'I've had a few calls from farming clients regarding their options,'said Samantha Gibson of Canaccord Wealth.
'One farmer wondered if he could gift the farm within his lifetime by making it a PET (potentially exempt transfer).
'This is a difficult one. As a PET, the famer could not benefit from the farm – no longer live in the farmhouse, or benefit from the revenue.
'The farmer might need to be employed by his beneficiary as a salaried farm manager, but there would be broader tax implications of this.'
'This problem is one that needs a lot of analysis and several professionals involved,' Gibson said.
