Financial advisors reveal questions they answer following the budget

The dust has settled after Rachel Reeves’ budget last week and many are concerned about how new rules will affect them and their finances.

The main concerns about the series of changes announced by the Chancellor are increases in capital gains tax and the inclusion of pensions in estates for inheritance tax calculations, financial advisers said.

The capital gains tax increase, which took effect immediately, increased the levy from 10 to 18 percent for basic rate taxpayers, and from 20 percent to 24 percent for higher rate taxpayers.

Meanwhile, the government also announced that pensions would be included among assets counting towards the 40 percent inheritance tax rate, although this measure will not 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 take action now to protect your money.

Pensions included in inheritances

The main concern for many is the news that pensions will be included in inheritance tax calculations.

Inheritance tax of 40 percent is levied on estates above a certain size.

You must 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 pay inheritance tax. This is known as the zero interest rate band.

But there is another significant allowance – the nil rate band – which raises the threshold to a joint £1 million if you have a partner, own a property and plan to leave money to your direct descendants.

Once an estate reaches £2 million, this home ownership allowance is removed by £1 for every £2 above this threshold. It disappears completely by £2.3 million

Now that pensions are part of this calculation, many more people could end up on top of benefits.

Samantha Gibson, senior wealth planner at Canaccord Wealth said: ‘Where IHT currently only applied to around 6 per cent of UK estates, this move will drag many more people into the IHT bracket.

‘One client asked whether, if he inherits his elderly father’s pension, which is over £1 million, as an additional taxpayer he would have to pay 40 per cent IHT and then also pay 45 per cent income tax if he took advantage of it. – so what could effectively be a 67 percent tax.

“It sounds horrible, but early indications are that this could be the worst-case scenario.”

Reducing the zero rate to zero for estates worth £2.3 million could also contribute to the inheritance tax payable on the pension, meaning an effective tax rate of 70.5 per cent.

Cannaccord warns people not to change their retirement behavior as the changes won’t come into effect until 2027.

Following this, Ray Black, director of Money Minder, told This is Money: ‘I have highlighted that although the changes to the IHT regime have been predicted, they have not yet been implemented.’

Indeed, Quilter Cheviot says it expects adjustments will be made to the policy before it is implemented.

Should I draw on my pension now?

Previously, many with estates above the thresholds set out above used their pensions to shield some of their wealth from inheritance tax.

They have chosen to use other assets to fund their retirement, and instead pass on their pension when they die.

David Gibb, financial planner at Quilter Cheviot, said: ‘Many clients funded their pensions and took advantage of the increased annual benefit and the abolition of the lifetime benefit to increase funding for their pensions as a result of the government’s legislative changes.

“We’ll have to wait for the details to emerge, but annuities will most likely be used in many planning and retirement strategies now.

‘Business customers who are not currently using salary sacrifice should consider this as a way to help alleviate the increased burden resulting from the changes to National Employer Insurance.’

Lisa Caplan, chartered financial planner at Charles Stanley, said one of her clients has used his Isa funds to maintain his Sipp for inheritance tax purposes, but is unsure whether he should now draw on his Sipp.

Caplan said: ‘It may make sense to take money out of the Sipp, but while money taken out of an Isa doesn’t count for income tax, money taken out of a Sipp is taxable after the 25 per cent tax free allowance.

‘So I would suggest staying below the higher tax rate, which at 40 percent is equal to the inheritance tax.

‘Pensions remain a tax shield against income tax and capital gains tax, while the money remains in the pension. This is a real advantage.’

She added: “One option is to take his tax-free money and give it to his children. It will escape the IHT net after seven years.

“Bringing this forward could be of greater benefit to his children now that they are younger and still establishing themselves financially.”

> I’m 64. Should I transfer £20,000 a year from my pension into an Isa after a tax return in the budget?

How will the capital gains tax increase affect you?

The increases to the CGT appeared to be one of the major policy changes announced in the budget.

With rates now in line with the higher rates for those with second homes, more and more people will face significant capital gains tax bills in the coming months.

It is not surprising that it is a topic that financial advisors are increasingly asked about.

Quilter Cheviot’s David Gibb told This is Money: ‘As the capital gains tax increase was in effect from the date of the budget, there are no real planning opportunities, although many clients realized profits before the budget, which turned out to be the case. very good planning.’

As a result of the CGT increase, Gibb says customers are now keen to know where they should put their money to be as tax efficient as possible.

He said: ‘With the increase in CGT and recent reductions in the annual exemption amount, investment bonds are now more attractive to many investors than general investment accounts.

“As a result, new investment money could well find its way into investment bonds, as opposed to these unpackaged general investment accounts.”

What does the budget mean for inflation?

While inheritance tax and capital gains tax are undoubtedly top of the agenda for richer people, there are other possible outcomes of the Budget that are not making the headlines.

Ray Black of Money Less said: ‘The government’s increased borrowing and higher public spending means there is a real risk that inflation will rise in the short term.

‘It is therefore crucial to maintain a diversified investment portfolio to protect against long-term inflation risks.’

According to Black, there is a risk of stagflation in the short term due to the potentially inflationary budget.

He said: ‘The forecast from the Office for Budget Responsibility suggests that inflationary pressures could persist as a result of the fiscal measures.

‘High borrowing costs and global uncertainties such as energy price fluctuations increase the risk of stagflation – where slow economic growth is accompanied by high inflation.

‘Rachel Reeves’ tax hike measures, including increasing employer national insurance contributions and increased government borrowing, could drive up business costs and potentially limit wage growth and hiring, while consumer prices rise.’

Black said while investors need to ensure their holdings are diversified, companies need to ensure they manage their costs effectively.

A future for farmers?

With farms now having to pay inheritance tax if they are worth more than £1 million, many farmers are concerned that their loved ones will struggle to pay the tax bill if they pass on their farm.

Inheritance tax calculations also include machinery such as combine harvesters and tractors, some of which can be worth hundreds of thousands of pounds.

“I’ve had a few calls from farm clients about their options,” says Samantha Gibson of Canaccord Wealth.

‘One farmer wondered if he could give the farm as a gift during his lifetime by making it a PET (potentially exempt transfer).

‘This is a tough one. As a PET, the farmer could no longer benefit from the farm – no longer live in the farm or benefit from the income.

‘The farmer may have to be employed by his beneficiary as a salaried farm manager, but this would have wider tax implications.’

“This problem requires a lot of analysis and multiple professionals involved,” Gibson said.