How will the Autumn Budget 2024 affect you?

The Autumn Budget 2024 ended months of fevered speculation over how the Chancellor of the Exchequer, Rachel Reeves, would balance the books. Many feel the planned tax rises could have been worse, but the first Labour Budget in 14 years ushers in significant change.

This is especially true in regard to Inheritance Tax (IHT), and will change how individuals can pass wealth onto the next generation. While some consider this unpopular tax to be a positive force to reduce inequality, others see it as unfair. Largely because most individuals have already paid tax on their accumulated wealth.

In this article, we focus on how the Budget will affect your investments, particularly in regard to estate planning, and potential action to consider.

The key changes discussed below are:

• Inheritance Tax on unused pensions.
• Reduction of Inheritance Tax relief for agricultural and business property.
• Increases in Capital Gains Tax.
• Non-doms and non-UK residents.

Tax on unspent pension savings

Since 2015, personal pension plans have been a tax efficient way to transfer assets to the next generation. Unspent pension savings could be passed on without being subject to Inheritance Tax – subject to certain conditions.

From April 2027, pension savings will become part of an individual’s estate and taxed accordingly. That is, there is a tax of 40 per cent on the portion above the nil rate band (£325,000 or £650,000 for a couple).

And more tax on top…

On top of this, it’s possible that pension savings will be subject to both IHT and income tax. This is because when death occurs after the age of 75, the individual’s beneficiaries pay income tax on withdrawals from the pension fund. It seems this might still be the case under the new rules, even though Inheritance Tax has already been paid.

That is not the end of the story. As pension savings will be part of the estate, more estates will be above the nil-rate band of £325,000 (or £650,000 for a couple). Consequently, more people will pay Inheritance Tax.

For individuals or couples leaving a family home to their children or grandchildren, the impact may be greater still. Currently, the nil-rate band rises to £500,000 in this situation (or £1 million for a couple). However, this reduces when the total estate value exceeds £2 million. As the total sum now includes pension pots, many more estates will go over this £2 million threshold.

What can you do to protect pension savings?

Firstly, it’s important to remember that these changes do not take effect until April 2027. And that there will be a consultation and wider debate, so the final details are yet to be ironed out.

‘While it’s important not to make rash decisions, this is a good time to start considering options,’ says AJB Wealth’s Managing Director, Paul Willans. ‘Clients who anticipated a relatively small percentage of Inheritance Tax, are now looking at hundreds of thousands of pounds going to the Inland Revenue. We hope that by planning ahead with them now, we can protect their assets in the future.’

As ever, it’s essential to take professional advice to ensure that you cover all angles and avoid pitfalls. These are some strategies your wealth manager or planner might consider.

1.       Are you striking the right balance between pensions and other assets?

Whether  you’re still working or in retirement, you should consider whether you have the right balance between pension savings and other investments. If you use a self-invested personal pension (SIPP) for estate planning purposes, you might want to reconsider your approach.

Until now, many retired people chose to draw on pension savings last. Under the new rules, it may make sense to use pension savings first. This is because most investments are subject only to Inheritance Tax. Under new rules, it’s possible that unused pension pots may be subject to both Inheritance Tax and Income Tax.

2. Should you withdraw tax-free cash?

Those aged 55 and over can usually withdraw 25 per cent of their pension tax-free per year. This is up to a lifetime maximum of £268,275. In some cases, it may make sense to withdraw this tax-free cash now. You could potentially gift or reinvest it elsewhere, or use it instead of other investment income.

3. Consider making gifts or using trusts

A wealth manager can assist you with wider planning, and consider whether it would make sense to gift assets to your heirs. Thorough analysis, using cashflow analysis, is essential.

‘It’s crucial to get the right balance here, and ensure that clients will have sufficient funds to see them through retirement,’ explains Willans. ‘This includes taking account of potential care costs in later years, and other events.’

Gifts only become free of IHT after seven years. However, you can give away £3,000 per year tax-free (or £6,000, if you made no gifts in the previous year). And if your income exceeds spending, you have more flexibility. You can make regular gifts out of surplus income, and these are free of tax. Wealth managers can help you explore whether trusts might be an efficient tool. You should consult them as well as your lawyer, as trusts are a complex area.

4. Who will inherit your unused pension?

Review the death benefit nominations you’ve made for your pension. A spouse will not pay IHT. This may buy more time to pass on the funds to descendants, where appropriate, through gifts or other means.

5. A note on AIM funds

Individuals who are able to include higher risk investments in their portfolios might benefit from investing in funds investing in shares listed on the Alternative Investment Market (AIM). These investments are currently free from IHT if held for two years or more. From April 2026, AIM shares will be subject to IHT at 20%.

Other ways the Autumn 2024 Budget may affect your investments:

Agricultural Property Relief and Business Property Relief

Currently, agricultural property and other qualifying business property are eligible for 100 per cent relief from Inheritance Tax. This ensures farms and other family businesses can be passed to the next generation without being sold to pay Inheritance Tax.

From April 2026, only the first £1 million will be free from IHT. For qualifying assets over £1 million, IHT will be half the normal rate – resulting in a rate of 20%.

Shares which aren’t listed on recognised stock exchanges, including AIM shares, have also benefited from IHT relief. They will also be taxed at 50 per cent of the normal IHT rate from  April 2026.

Capital Gains Tax (CGT)

This is the tax you pay on profits when you sell certain assets, and your gains are more than £3,000 that year. With immediate effect, it will increase from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate and additional rate taxpayers.  This brings it in line with the CGT on residential property.

These rate increases make it even more worthwhile investing in ISAs, as you pay no CGT on earnings from ISAs. Under current rules, you can invest up to £20,000 in ISAs in the 2024-25 tax year. The annual ISA limit will remain at £20,000 until 2030. This limit applies across all your ISAs, including Cash ISAs and Stocks and Shares ISAs. The Junior ISA limit will also remain the same – at £9,000 until 2030.

Business Asset Disposal Relief (Entrepreneurs’ Relief)

This relief provides a special rate of CGT of 10% on disposals of business assets up to a lifetime allowance of £1 million. From 6 April 2025, the rate of CGT will increase to 14% and from 6 April 2026 to 18%, on disposals up to £1 million.

New rules for non-doms and UK residents

End of the non-dom regime

The new Foreign Income and Gains (FIG) regime, starting in April next year, means that taxation is determined by UK residency rather than domicile. That means that individuals who live in the UK but have permanent homes abroad can no longer apply to be non-doms, and thus avoid paying tax on earnings from overseas.

Individuals who become UK resident having been non-resident for more than 10 years will not pay UK tax on their overseas income and gains for the first four tax years here. After the four-year period, they are liable to pay tax in the same way as other UK residents.

Inheritance Tax on worldwide assets

From 6 April 2025, IHT will apply on the worldwide assets of long-term UK residents. This is typically where someone has been resident in the UK for more than 10 years in the last 20 years. Where someone ceases to be UK resident, they will remain subject to IHT for up to 10 years after leaving the UK.

In conclusion

As the thresholds for paying IHT are frozen until 2030, the percentage of people paying this tax will continue to rise with inflation. Making pension pots subject to IHT will significantly increase the burden. Though the details are yet to be finalised before coming into effect in April 2027.

‘It’s important to consider options carefully and not rush into anything before we know all the details,’ cautions Willans. ‘However, remember that planning ahead with your wealth manager is the best way to ensure the most positive outcome, and this is the time to start having those discussions.’

The team at AJB Wealth can help you navigate the changes brought about by the Autumn Budget 2024. To discuss your situation, please book an obligation-free consultation, or call us on 01428 774 070.

Important: The content of this bulletin is for general consideration only and does not constitute advice. No action must be taken, or refrained from being taken, without advice and this company accepts no responsibility for any loss occasioned as a result of any such action, or inaction. It’s important to remember that investments can fall, as well as rise. And, in the event of early encashment, you may receive less back than your original investment. Pension and tax rules can change and any benefits will depend on your personal circumstances and your eligibility for state benefits. Some AIM investments may be viewed as less risky than others. However, investors should remember that AIMs as a whole are higher-risk investments, and may not be suitable for them.