Home Money Financial advisors reveal the questions they are answering after the Budget

Financial advisors reveal the questions they are answering after the Budget

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Post-Budget Concerns: Financial advice clients are concerned about the effect on their financial situation.

The dust is settling after Rachel Reeves’ budget last week and many are worried about how the new rules could affect them and their finances.

According to financial advisers, the main concerns about the series of changes announced by the Chancellor are the increases in capital gains tax and the inclusion of pensions in inheritances for the calculation of inheritance tax.

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

Post-Budget Concerns: Financial advice clients are concerned about the effect on their financial situation.

Meanwhile, the government also announced that pensions would be included in assets that count towards the 40 per cent inheritance tax rate, although this measure will not come into force until April 2027.

This is Money spoke to financial advisers to find out what their clients are asking of them after 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

Canaccord’s Samantha Gibson says an increasing number of people will face an IHT bill under the new rules

Pensions included in farms

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

Inheritance tax applies at 40 percent on inheritances above a certain size.

It 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 have to pay inheritance tax. This is known as the zero rate band.

But there is another important allowance, the nil residence rate band, which increases the threshold to a combined £1m if you have a partner, own property and intend to leave money to your direct descendants.

Once an estate reaches £2 million, this home ownership allowance begins to be phased out by £1 for every £2 above this threshold. Completely disappears at £2.3 million

Now that pensions are part of this calculation, many more could find themselves on top of allowances.

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

‘A client asked if when he inherited his elderly father’s pension, which is over £1 million, as an additional rate taxpayer he would have to pay 40 per cent IHT and then also pay 45 per cent income tax if I had to resort to it. – So what could a 67 percent tax effectively be?

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

The gradual reduction of the nil residence rate band to zero for estates worth £2.3 million could also increase the inheritance tax due on the pension, meaning an effective tax rate of 70.5 per cent.

Cannaccord warns that people should not change their pension behavior because the changes will not come into force until 2027.

Ray Black, CEO of Money Minder, echoed this, telling This is Money: “I have emphasized that although changes to the IHT regime are forecast, they have not yet been implemented.”

In fact, Quilter Cheviot says he hopes adjustments will be made to the policy before it is implemented.

Should I collect my pension now?

Previously, many people with assets higher than the thresholds explained above used their pensions to protect part 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, chartered financial planner at Quilter Cheviot, said: “Many clients were funding their pensions and taking advantage of the increase in the annual allowance and the abolition of the lifetime allowance to boost their pension funds following the government’s legislative changes.

‘We need to wait until the details are known, 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 arising from changes to employer National Insurance.”

Lisa Caplan, a chartered financial planner at Charles Stanley, said one of her clients has been using her Isa funds to preserve her Sipp for inheritance tax purposes, but is unsure whether she should now withdraw money from her Sipp.

Caplan said: “It may make sense to take money from the Sipp, but while money taken from an Isa does not count towards income tax, money taken from a Sipp after the 25 per cent tax-free relief will be subject to it. to taxes”.

‘Therefore I would suggest staying below the highest tax rate, which at 40 per cent is equivalent to inheritance tax.

‘Pensions remain a tax shelter from income tax and capital gains tax while the money remains in the pension. This is a real benefit.”

He added: ‘One possibility is to take your tax-free money and give it to your children. It will leave the IHT network after seven years.

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

> I am 64 years old. Should I move £20,000 a year from my pension into an Isa after the inheritance tax raid in the Budget?

How do capital gains tax increases affect you?

The CGT increases turned out to be one of the most important policy changes announced in the Budget.

With the rates matching the highest rates for those with second homes, more and more people will face hefty capital gains tax bills in the coming months.

Unsurprisingly, it’s a topic that financial advisors are increasingly being asked about.

David Gibb of Quilter Cheviot told This is Money: “As the capital gains tax increase came into effect from the budget date, there are no real planning opportunities, although many clients did make profits before the budget , which turned out to be very good planning.”

As a result of the CGT increase, Gibb says clients are now interested in where they need to put their money to be as tax efficient as possible.

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

“Consequently, it is possible that new investment money will find its way into investment bonds, rather than into these general unwrapped investment accounts.”

What does the Budget mean for inflation?

While inheritance tax and capital gains tax are certainly on the minds of the richest people, there are other potential outcomes of the Budget that are not making the headlines.

Money Minder’s Ray Black said: ‘With government borrowing rising and public spending increasing, there is a real risk that inflation will rise in the short term.

“It is crucial, therefore, to maintain a diversified investment portfolio to protect against prolonged inflation risks.”

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

He said: ‘The Office for Budget Responsibility forecast suggests inflation pressures could persist due to budget measures.

‘High borrowing costs and global uncertainties such as energy price fluctuations add to the risk of stagflation, where slow economic growth coexists with high inflation.

“Rachel Reeves’ tax increase measures, including increasing employer contributions to National Insurance and higher government borrowing, could increase business costs and potentially limit wage and hiring growth, while increasing consumer prices”.

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

Ray Black warns that the budget could cause inflation in the short term

Ray Black warns that the budget could cause inflation in the short term

A future for farmers?

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

Inheritance tax calculations 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 agricultural clients about their options,” said Samantha Gibson of Canaccord Wealth.

‘A farmer wondered if he could donate the farm during his lifetime by making it a PET (potentially exempt transfer).

‘This is difficult. As a PET, the farmer could not benefit from the farm: he would no longer live on it or benefit from the income.

“The farmer may need 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 the involvement of several professionals,” Gibson said.

Get answers to your financial planning question

Financial planning can help you grow your wealth and ensure your finances are as tax efficient as possible.

A key factor for many people is investing for retirement, tax planning and inheritance.

If you have any questions about financial planning or advice, our experts can help you answer them. Email: Financialplanning@thisismoney.co.uk.

Please include as many details as possible in your question so we can answer in depth.

We will do our best to respond to your message in a future column, but we will not be able to respond to everyone or correspond privately with readers. Nothing in the answers constitutes regulated financial advice. Posted questions are sometimes edited for brevity or other reasons.

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