Estate Planning – IHT & Pensions
How have the changes announced in the 2024 Autumn Budget impacted on your Pension and Inheritance Tax planning?
The 2024 Autumn Budget introduced significant changes affecting pensions and inheritance tax, marking a pivotal shift in financial planning strategies. The budget, highly anticipated due to a change in government, brought unexpected developments, particularly the inclusion of pensions in inheritance tax calculations.
Estate planning – changes in Pension and Inheritance Tax
Previously, unused pensions could be passed to beneficiaries tax-free if the individual passed away before age 75. Post-75, benefits were taxed at the recipient’s marginal income tax rate.
The 2024 budget changed this landscape significantly. From April 2027, pensions will be subject to inheritance tax at a rate of 40% if the individual dies after age 75. This results in a potential effective tax rate of 67% for additional rate taxpayers, prompting a reevaluation of wealth transfer strategies.
Strategic adjustments in financial planning
Historically, financial planning advised funding pensions first to maximise tax relief, followed by ISAs and general investment accounts. The new tax implications necessitate a shift in strategy. It is now advisable to utilise pensions first for income needs in retirement, preserving ISAs and other investments for inheritance tax planning.
Estate planning – tax mitigation strategies
To mitigate the inheritance tax impact, several strategies are under consideration:
- Drawdown Plans: Crystallizing the pension pot and taking an income allows for gifting out of income, which is not included in inheritance tax calculations, or purchasing a whole of life annuity plan.
- Annuity Purchase: Buying an annuity with the pension pot removes the capital value from the estate for inheritance tax purposes. The income from the annuity can be used to purchase a whole of life plan, providing a tax-free lump sum to beneficiaries.
Estate planning – example scenario
Consider Mr. Smith, with a £1 million pension pot intended for his children.
By purchasing an annuity, he receives a monthly income and can invest in a whole of life plan.
Upon his death, the plan pays out tax-free to beneficiaries, while the annuity remains outside the estate.
Broader inheritance tax changes
The budget also introduced changes to business property relief, capping it at £1 million from 2026, with a 50% relief thereafter. This affects AIM shares and unquoted company shares, previously used for inheritance tax planning.
Trusts and Domicile Considerations
The concept of domicile is being replaced with residency for inheritance tax purposes, simplifying the process. Long-term non-residents will only be liable for UK inheritance tax on UK-sited assets.
Estate Planning what conclusions can we draw?
The 2024 Autumn Budget certainly necessitates a reevaluation of financial planning strategies, particularly concerning pensions and inheritance tax. Engaging with financial advisors to explore these changes and potential mitigation strategies is crucial for effective wealth management.
If you would like to speak to a member of our tax team or if you wish to contact our Financial Services team, contact us on 020 7870 9050 or email us at hello@rpgcc.co.uk.
