November 2024

Nov 28

Pension Death Benefit changes

By FAS | Pensions

Amongst the more impactful announcements within the Autumn Budget were the proposed changes to the treatment of death benefits paid from a registered pension scheme. From 6^th April 2027, most death benefits and unused pension funds held at date of death will form part of an individual’s estate for Inheritance Tax (IHT) purposes.

This is a significant change from the tax-advantaged position that currently applies. At present, unused pension funds, or remaining pension funds held in Flexi-Access Drawdown, can be passed to beneficiaries at the discretion of the pension trustees, outside of their estate for IHT purposes. This effectively allows unused pension funds to be cascaded through generations and is an effective estate planning tool.

Threat of double taxation

Not only could unused pension fund death benefits be subject to IHT, depending on the individual’s other assets, it appears that the existing tax rules for those drawing death benefits from a beneficiary’s drawdown pot will remain in place. If the pension holder dies before the age of 75, the beneficiary can draw down on the inherited pot without income tax applying to the payments, irrespective of whether the beneficiary draws ad hoc lump sums or a regular income. The situation is very different if an individual dies after the age of 75, where the beneficiary is taxed at their marginal rate of income tax on monies drawn from the pension. From April 2027, the value of the pension could potentially be subject to IHT at 40%, and funds drawn from the inherited pension could then also be subject to higher rate income tax (40%) or additional rate income tax (45%), once drawn, in the hands of the beneficiary. This could potentially lead to a total tax burden of 67% if the pension fund suffers IHT and the beneficiary drawing the pension is an additional rate (45%) taxpayer.

Spousal exemption remains

The position from April 2027 will remain unchanged when pension benefits are paid to a spouse or civil partner, as this will be covered by the IHT spousal exemption. Pensions left in favour of a surviving spouse will not be subject to IHT; however, just as is currently the case with assets other than pensions, the IHT liability will usually arise on the second of a married couple to pass.

Consultation process

It is important to note that the proposed changes do not come into force for another 2 years and 4 months. We therefore feel it would not be sensible to take knee-jerk decisions to adjust your financial plans.

The Government have launched a consultation with industry stakeholders, which will run until January 2025, to iron out how the new rules will work in practice. Any significant change to the proposals is unlikely; however, major logistical challenges remain on how the tax will be collected, and by whom. As the legislation seems to suggest that IHT on pensions will be due within six months of death, this will place considerable pressure on executors and pension scheme administrators to liaise and pay the right amount of tax due, to avoid interest being charged. Many legal experts are suggesting such changes may well introduce further delays to the probate process, meaning that beneficiaries have a longer wait before receiving funds from the estate.

The importance of holistic planning

Whilst no immediate action may be needed, it is important to begin to understand the implications of the new rules on unused pension funds and death benefits you hold. For those with unused pension funds, it will be important to review pension values to determine whether the change in rules alters the potential IHT liability on your estate.

There are a range of options that individuals who are holding unused pension funds could consider in order to mitigate a potential liability. These could include crystallising the pension and making gifts of the Tax-free Cash element, drawing additional income from a Flexi-Access Drawdown arrangement and making gifts out of surplus income or purchasing an annuity. You could also consider planning with other assets held outside of a pension, which could be invested to mitigate the potential IHT liability or look to protection policies.

It is clear that a holistic approach, which is tailored to the individual, will be key to effective planning, as the most appropriate option in each case will depend on the precise composition of assets held, family circumstances, financial objectives and attitude to risk.

The advisers at FAS always take a holistic approach to financial planning. We look at a wide range of aspects of an individual’s financial position, and as an independent firm, we can consider solutions from across the marketplace without restriction. If you have questions relating to the changes announced in the Budget, speak to one of our experienced advisers who will be happy to help.

Nov 21

Outlook for US markets post election

By FAS | Investments

Positive early reaction

In the immediate aftermath of the election, US equities saw strong trading, with the S&P500 index pushing through the 6,000 level for the first time. A factor boosting the short-term positivity may well be the absence of uncertainty over the election result, which brought about market volatility in the aftermath of the 2020 election.

Whilst equities have reacted positively, bond yields have risen, as investors flee from US Treasuries. This reaction is understandable, as the likely policies a second Trump term will bring, such as tax cuts and increased tariffs, may well be inflationary. This could undo the work of the Federal Reserve, who have been successful in reducing inflation, so that it rests just above the Federal Reserve target. Markets have been anticipating a series of US interest rate cuts during 2025, which would help support a slowing economy. Depending on the speed and size of expansionary plans laid out by the Trump administration, the pace of interest rate cuts could slow, meaning interest rates remain higher for longer. This impacts the US housing market and could weaken consumer confidence.

A second Trump term may well herald a series of tax cuts, including those borne by business. This could improve US corporate profitability and potentially support higher valuations. An extension to personal tax cuts introduced in 2017, which are due to expire next year, is likely, which could ease some of the cost-of-living pressures currently facing US households.

America first policies

Trump consistently proposed the introduction of international trade tariffs during his election campaign, to refocus on domestic production, employment, and growth.

The extent to which tariffs are imposed remains open to question, as some of the more extreme claims made prior to the election could simply be used as bargaining chips; however, any extension of import tariffs has the potential to drive the price of goods and services higher, leading to higher inflation and a possible fall in consumer confidence. Countries are, of course, able to retaliate by imposing their own tariffs on US goods and services, leading to a trade war. This could dampen global growth, and lead to further friction, particularly with countries with significant export markets, such as China.

It is possible that mid-sized and smaller US companies could see higher demand for domestic goods and services due to higher tariffs, although weakness in consumer confidence and higher prices could offset any benefit to US domestic suppliers.

Trump and global conflict

On balance, the second Trump term increases the potential for market volatility due to geopolitical instability. The World waits to see actions Trump could take in respect of the Russian invasion of Ukraine. Such decisions could have wider implications for the future of NATO and could see European nations increase spending on defence. Should the conflict end, this could well secure energy supplies going forward and remove the risk to potential supply shocks that caused market concern at the outset of the conflict.

Commodity prices may also be influenced by events in the Middle East. The ongoing tensions in the region have yet to cause significant concern to global equities and commodity markets over the course of this year; however, actions taken by the new administration could increase tension and any significant escalation could see oil production fall, potentially leading to higher prices.

Sector winners and losers

A range of sectors of the US economy are likely to be direct beneficiaries of policies introduced by the Trump administration, whilst others could face a more difficult future. Banks and Financials may well benefit from lower government regulation and red tape, and if US interest rates stay a little higher for longer, this could boost profitability. Oil and Gas producers may also be big winners, given the suggestions that Trump will look to expand US production. On the other hand, the renewable energy sector has already come under pressure since the election result, as Trump may well reduce tax credits and other incentives that have driven the boom in renewables across the US.

The largest US tech stocks have contributed a considerable proportion of the growth seen in US markets over the last year, and these tech giants have seen significant inflows at the expense of more traditional sectors of the economy. The difference in performance between high growth and value stocks has been clear, and this gap may well narrow following the US election result. The outcome may also benefit mid and smaller sized US companies, which have underperformed the mega-cap global giants.

Implications for portfolio asset allocation

In the wake of the US election result, equity markets have rallied on the expectation of corporate tax cuts and deregulation, coupled with relief that the election result was clear cut, without the uncertainty seen following the result in 2020. Treasury markets have given a less positive reaction to the Trump re-election. Given that policy decisions are likely to increase borrowing and fuel inflation, bonds have come under pressure, as inflationary fears have the potential to derail the Federal Reserve’s intended path for US interest rates.

2024 has proved fruitful for investors, and the outlook for 2025 appears robust; however, decisions taken by the second Trump administration in respect of both domestic and foreign policy may well increase volatility, as well as opening opportunities. As we head into more uncertainty, it would be an appropriate time to review existing investment portfolios to consider the asset allocation and strategy adopted. Speak to one of our experienced advisers to discuss your exposure to US equities and how the election result could impact market sentiment.

Nov 07

How to plan around Budget CGT rate hikes

By FAS | Tax Planning

One of the key measures announced in last week’s Budget was a hike in the rate of Capital Gains Tax (CGT) paid on disposal of investments. The move had been widely flagged by the media and commentators; however, predictions of a significant jump in the rate of CGT have proven to be wide of the mark.

With effect from 30^th October, gains made on the disposal of investments will be subject to new rates of CGT, depending on the overall tax position of the individual making the gain. For those within the basic rate tax band, the rate of CGT has increased from 10% to 18% and for those in the higher and additional tax bands, the rate has increased from 20% to 24%. The new rates are aligned with the rates that already applied to the sale of residential property, which remain unchanged.

Not as bad as predicted

In the weeks leading up to the Budget statement, commentators were speculating that the rate of CGT could see a large increase, with predictions of rates between 30% and 40% being forecast. On the face of it, the new CGT rates are, therefore, not as painful for investors as could have been the case.

The annual exempt amount, i.e. the net gain an individual can make in a tax year without paying CGT, remains at £3,000, with 50% of the annual exempt amount being available to trustees. The exempt amount had already been reduced from £12,300 to £6,000 and again to £3,000 in previous Budget statements. Investors should look to make use of the annual CGT exemption each tax year, as unused exempt amounts cannot be carried forward to another tax year. When the net balance of gains and losses in a tax year creates an overall loss, the loss amount can be carried forward indefinitely and be used to offset gains above the annual exempt amount in the future, as long as the loss has been reported to HMRC.

It is also important to note that CGT is effectively wiped out on death, and thankfully the Budget did not contain any change to this rule, as this would, in effect, lead to the potential for estates to face double taxation. As investments held on death are uplifted to their value at probate, beneficiaries receive the assets with a new purchase cost equivalent to the probate value.

Time to review your portfolio

For those holding investments outside of a tax-efficient wrapper, such as an Individual Savings Account (ISA), the hike in CGT rate should be a clarion call for investors to review their existing investment portfolios and consider how they are structured. As gains made from disposals of assets within an ISA are exempt from CGT, the increased rate of CGT further enhances the benefit of holding assets within an ISA wrapper. Investments held within an ISA also benefit from exemption from Income Tax, too. The Budget statement confirmed that the ISA allowance will remain fixed at £20,000 per tax year for the remainder of the parliament, and this provides the opportunity for investors to use the annual ISA allowance going forward with a degree of confidence.

For those seeking to shelter funds from CGT, alternative investment wrappers, such as Investment Bonds, now look increasingly attractive. Gains on Investment Bonds are subject to Income Tax, and not Capital Gains Tax, and investors can freely change investments inside the

Bond wrapper without triggering a charge to CGT.

As a result of the increase to CGT rates on investment gains, it may be appropriate to review how your investments are structured, to see whether greater tax-efficiency can be achieved from a combination of ISA and Investment Bond wrappers, rather than standard General Investment Accounts.

Business owners see hike in rates from April

Business owners looking to dispose of business assets will also see higher rates of CGT applied from April 2025, although a relief that reduces the rate paid by a business owner on the sale of a business remains available.

Formerly known as Entrepreneur’s Relief, Business Asset Disposal Relief (BADR) allows business owners and sole traders to sell their business with lower rates of CGT applying on disposal. To qualify for BADR, the business owner needs to prove ownership throughout the two-year period prior to disposal or in the case of a shareholder, needs to be beneficially entitled to 5% of profits distributed on winding up of the company or 5% of the sale proceeds. BADR will continue to apply to the first £1m of qualifying gains during an individual’s lifetime, with gains above this level charged at the standard rate of CGT.

Until 5^th April 2025, the current rate of CGT of just 10% will continue to apply to claims under BADR; however, this will increase to 14% from 6^th April 2025 and 18% from 6^th April 2026. Once the rate of CGT payable through BADR reaches this level, it will align with the CGT rate that applies to basic rate taxpayers. It does, however, still provide a small discount against the headline CGT rate of 24% that applies to higher rate taxpayers.

Planning Opportunities

The change to CGT rates should prompt investors to undertake a review of their existing investments to look for opportunities to reduce the potential tax liability in the future. Use of the annual ISA allowance, alternative structures such as Investment Bonds and other tax efficient investments, such as Venture Capital Trusts, can reduce an overall tax liability. For business owners looking to sell their business, higher rates of tax will apply from April; however, powerful tax planning tools remain available, such as the ability to make employer pension contributions, that could help achieve a more favourable outcome and reduce the overall tax burden.

Our expert advisers can provide independent advice on the options open to you. Speak to one of the team to start a conversation.