Navigating the UK Budget: your wealth planning priorities and next steps

The latest UK budget introduces significant changes that call for a close review of wealth planning. With changes affecting areas like pensions, currently held investments, and tax - including inheritance tax (IHT) and capital gains tax (CGT) - individuals with substantial assets may need to reconsider their long-term plans to safeguard and grow their wealth.

This article will explore the future impact of the budget, in as much detail as is currently possible, outlining essential steps to consider in each area before speaking with an expert Wealth Planner.

Pensions and inheritance tax planning

The Budget introduced one of the most impactful changes in recent years, by pulling pensions into the inheritance tax (IHT) net. However, it’s crucial to note that the legislation isn’t yet finalised. The government is in a consultation period, ending in January 2025, after which we’ll gain greater clarity.

But for now, wealthy people who didn’t anticipate needing their pension as a primary retirement income source - and instead saw it as an IHT planning tool - will need to rethink their strategy. Pension taxation has changed drastically over the years, and on each occasion, we have adjusted our advice:

• In 2006, new legislation introduced a 35% tax on pension death benefits, which was below the IHT rate of 40%, prompting us to encourage clients to draw on other assets and leave pensions intact
• When that death rate increased to 55%, we adjusted our advice, suggesting clients begin spending more of their pensions to preserve other assets that would be taxed at a lower rate
• In 2014, then Chancellor George Osborne removed this ‘death tax’ altogether, so we shifted to recommending clients not to draw on their pension
• Now, with the recent changes, we may once again advise clients to consider drawing from pensions strategically.

This cycle highlights a key takeaway: having flexibility in investment and pension planning is essential. If individuals can adjust their approach as legislation evolves, they’re in a stronger position to adapt to changes without facing irreversible consequences.

Until the details are fully defined, however, the situation remains complex. With so many moving parts, it’s a period that requires careful consideration with the help of a professional.

There are other IHT planning tools we can discuss, such as gifting excess income or funding a whole of life policy, even if pensions are no longer an option.

Changes to inheritance tax on business assets

The Budget introduced other significant updates to IHT, particularly affecting business and agricultural relief (more on this below). These changes may impact clients with substantial investments tied up in business assets, often assumed to be outside their estate for IHT purposes.

For some, this shift could mean reconsidering business holdings and perhaps extracting funds sooner rather than later, as a planning window exists until April 2026, when these changes come into effect.

Until then, there may be an opportunity to transfer business assets, currently attracting a zero IHT rate, into a discretionary trust. This move could avoid triggering taxes that typically apply if the asset exceeds the nil-rate IHT band (the threshold up to which an individual’s estate can be passed on free of inheritance tax). For clients with assets qualifying for business relief, using discretionary trusts could be a valuable strategy before the legislation changes. However, we recognise that anti-forestalling measures* may limit opportunities to shelter significant IHT.

In navigating these adjustments, our role as your wealth manager is crucial, and also involves collaborating with our clients’ legal and tax advisers. These conversations, especially regarding family-owned businesses, parallel the impact on agricultural relief, where the goal of business property relief has historically been to prevent families from having to sell a business to pay IHT. Now, with a reduction in relief to 50% on assets over £1m, clients will likely need to revisit strategies, as these adjustments will affect family business planning going forward.

Lastly, around 25% of wealthy individuals lack an IHT strategy¹. Our specialist financial planning for business owners is dedicated to addressing this, especially for those focused on exiting their business who have not considered the broader IHT implications.

Investing in the Alternative Investment Market

Recent changes will impact the Alternative Investment Market (AIM) market, with a 50% reduction in business relief for AIM shares, rather than its complete removal. This partial cut may have alleviated some concerns, but it’s led certain companies to reconsider their AIM listing. Some have chosen to graduate to the FTSE 250, while others have opted to go private, responding to ongoing uncertainties in the AIM market. This adjustment to business relief might add to the market's challenges but does not eliminate its value for investors.

For individuals using AIM-listed investments within ISAs, there are still tax benefits. Even with reduced relief, assets taxed at an effective 20% rate remain more favourable than those facing a 40% IHT rate, so AIM investments can still play a strategic role, particularly within ISAs, but only for investors prepared to take on the higher risks associated with AIM-listed companies.

Agricultural business relief

The changes to agricultural relief have caused significant concern, particularly among farmers. Under the new rules, agricultural assets over £1m will now receive only 50% relief against IHT, meaning a 20% IHT rate will apply to farmland and related assets above this threshold. While there’s still uncertainty about how the new rules will apply, particularly with respect to allowances, exemptions, and the residential property nil-rate band, the potential impact is clear.

For many farmers, their land and assets may not need to be vast to cross the £1m threshold, bringing them into the IHT net. While older farmers may worry about these changes, it’s the next generation of farmers who will likely face the tax burden. However, it’s important to note that the tax won’t need to be paid in a lump sum - any tax owed can be spread over 10 years, softening the immediate financial impact. Even so, this shift in relief seems an unusual point of focus given the unique challenges farmers already face.

Change to capital gains tax

While a higher CGT rate could start to influence decisions - especially for those with large gains, such as £0.5m on a second property - at 24%, it’s still not high enough to drive major changes in investor behaviour. Previously, property was taxed at 28%, so the difference is less impactful.

The key factor for many is the ability to make decisions about transactions. While you can’t control earning money or when you die, you can decide whether to go ahead with a transaction - and that’s where tax rates become a consideration. But at 24%, it’s unlikely to push people to act differently in the long term.

There are several CGT deferral options we can discuss, like Enterprise Investment Schemes (EIS), but deferring a 24% tax gain might just lead to a higher rate down the line if the tax rate increases in the future. In the current environment, if you’ve made a capital gain, paying the 24% now might be the more strategic choice.

Escaping the Budget changes with non-dom status?

Leaving the UK tax net, especially after living here for a long time, is far from simple.

While exiting the income tax net can be relatively easy - spend 12 months living abroad for example - getting out of the UK’s tax residency and IHT system is much more complicated - and many clients are unaware of the complexities involved and the broader implications.

For example, you might be thinking about moving abroad to avoid IHT, but it could take 10 years to fully exit the IHT net - and so it may be more effective to give money away instead of waiting that long.

Overall, it's a significant commitment that we strongly recommend be carefully planned with the help of an accountant.

Use this short window of wealth planning opportunity wisely

While it’s important to wait for further details, it's clear that the UK Budget introduces significant changes that could impact individual wealth.

With some of these changes being phased in over time, it’s essential for individuals with substantial assets to stay calm and avoid making hasty financial decisions without consulting a professional if you want to protect and grow their wealth. We’re here and happy to help.

If you wish to speak to a Wealth Planner about next steps following the UK budget please get in touch to arrange a free initial consultation, without any obligation, with one of our experienced team.

*Anti-forestalling measures are rules designed to stop people from taking advantage of tax benefits before new tax changes take effect.

You may also be interested in:

• Whole of life cover: The 'secret’ inheritance tax mitigation tool
• Keep on track with your retirement goals: five key tips
• Why cash flow planning is not just for business

Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity. The tax treatment of all investments depends upon individual circumstances and the levels and basis of taxation may change in the future. Investors should discuss their financial arrangements with their own tax adviser before investing.

1Just 26% of HNWs have IHT strategies in place - FTAdviser