Post Budget - What's the message for your personal finances?

Jean Alphonse Karr was a French critic and journalist who lived in a particularly turbulent time in France’s history. Living during the reign of Napoleon III – the last emperor of France – he lived through coups, revolutions, the re-introduction of a constitutional republic and subsequent slide back into an empire.

Karr is most famous for his aphorism “Plus ca change, plus c’est la meme chose” or “the more things change, the more they stay the same”. It is hard to marry the stoicism of Karr as he lived through a Game of Thrones-esque political situation playing out in France and the near deafening noise we recently experienced ahead of Rachel Reeves inaugural budget in the press.

Speculation was rife: Tax-free cash from pensions was going to be abolished; Capital Gains Tax was going to be taxed at 200% or something approximate; wealth tax was going to be rolled out; and any number of other bleak dystopian tax predictions.

Now the dust has settled from the budget what has changed from a long-term planning perspective – a lot of change, for things to stay the same.

In this blog I will look at the changes and message to clients who fall into the following personal finance areas:

• Capital Gains Tax (CGT)
• Pensions

This will be followed up by a blog looking specifically at business owners who will have other considerations to go alongside these.

Capital Gains Tax (CGT)

CGT was introduced in 1965 by a Labour government looking to curb the rapid increase in property values in the post-war years. Originally brought in at 30%, before increasing to be in line with income tax rates by Nigel Lawson in 1988 and then reduced to 18% by Gordon Brown – this bounced around to 18% & 28%, then 10%, 20%, 18% & 28%; then 10%, 20%, 18% & 24% and the big change in Rachel Reeves budget was to just make CGT 18% & 24% - the more things change the more they stay the same.

So, what does that mean in pounds and pence, what are the biggest headaches caused by this change and what is the messaging we’ve been giving around this?

Pounds and pence

You realise a Capital Gain of £20,000, previously this would have created a CGT liability of between £1,700 within the basic rate tax band and £3,400 in the higher rate tax band (with the first £3,000 falling within your annual CGT Allowance).

Now the same gain is incurring a tax liability of between £3,060 and £4,800.

The biggest step-up is for the basic rate taxpayers who have seen an increase of 8% overnight – compared to the 4% for the higher rate taxpayers.

Biggest headache

The mid tax-year hike.

Someone selling down a portfolio of shares to live on now has the added headache that part of any gain realised will be taxed at two different rates – those shares sold before 30^th October 2024 are subject to rates of 10% or 20% and those after are subject to 18% and 24% respectively.

This can make the usual calculations far more complicated and discussing with your/an accountant would be a good idea.

Messaging

The pre-draft prognosticators were discussing the re-aligning of CGT with income tax rates but ultimately this has not happened, and it remains a significantly lower overall rate.

When looking at long-term planning and if you were weighing up between drawing from a pension or selling down shares – then the tax will sting a lot less from the shares than the pension and has done so since 2008.

Pensions

My favourite subject and probably the biggest proposed change in terms of personal finance.

Pre-Budget there was a lot of noise around the removal of tax-free cash. This was harder to see as unlike CGT when you only have to go back to 90’s/early 2000’s to see them aligned with income tax rates the removal of tax-free cash would have been a fairly unprecedented move.

The actual move was to bring ‘unspent pensions’ back into the realm of Inheritance Tax. So previously an untouched pension would have been passed down to the next generation completely free of Inheritance Tax, now the same pension will form part of the estate and potentially be subject to 40%

If you have not picked up on it yet though, the recurring theme of this blog is a lot of change for things to remain the same and this is even more prevalent in pensions because the one constant in pension legislation is change.

Since January 2015 we have had three entirely different treatments of pensions on death:

• Previously 25% or 55% on death, depending how it was received.
• Then capped to an overall limit, before the 25% & 55% was taken.
• Then no cap and no tax-charge
• Now the proposal is from 6^th April 2027 the pension will be treated as any other asset and be subject to potential IHT at 40%

So, what does that mean in pounds and pence, what are the biggest headaches caused by this change and what is the messaging we’ve been giving around this?

Pounds and Pence

Someone with £1 million in a pension previously could distribute this to whomever and it would not form part of their estate and not be subject to IHT at 40% (nor the previous charges of 55% & 25%)

This means that the beneficiaries of this pension are now likely to be £400,000 worse off.

However, where the pounds and pence get more difficult is that as this brings the pension into the estate aspects like, tapering of the main residence nil-rate band, could push the pounds and pence of the IHT liability as high as £540,000. An effective tax rate on death of 54%.

Biggest headache

The biggest headache is not the tax implications on death, but the tax implications of tax on receipt.

Now this comes with a significant caveat in that this is being looked at and we simply don’t have the detail yet – this should become clearer following a consultation in early 2025.

However, as it stands the pension could be subject to a double dose of inheritance tax and income tax by the beneficiary from 6^th April 2027.

So, as per the previous example somebody dies and leaves £1m in a pension, this pushes their estate into losing their main residence nil-rate band and sees an increase in their IHT liability of £540,000.

Now, the recipient closes the pension and takes out the remaining £460,000 – this is taxed at their marginal rate so let’s be generous and assume they have no other income, they would still pay income tax of £208,480.

So, of the original £1,000,000 the beneficiary could come out with a Net sum of £251,519 and HMRC will have taken tax at a marginal rate of 74.85%.

If the beneficiary has any income, this is only going to increase the tax liability.

Messaging

The messaging is simple in the short-term – let’s wait and see the detail the consultation in early 2025 brings. This will still give two years of planning to make any changes if we think they merit them.

The longer-term message is that ultimately, we have just had the third major change to pension death benefits in 9-years so we are averaging a new change every 3 years so putting in place wholesale changes based on legislation we know will likely change seems folly.

Getting the decumulation strategy right that allows you to do everything you want to do (including passing down wealth efficiently) is the better strategy than reacting to legislation.

So, lots of changes but the messaging remains largely the same pre and post budget: CGT is still a lower rate of tax than other equivalents; and pensions remain a useful vehicle to drive retirement spending, but constant legislative change continually causes headaches…

…“Plus ca change, plus c’est la meme chose”.

To speak to us about how the budget changes affect your situation, please contact us on 0131 220 0000 or enquiries@carbonfinancial.co.uk.

The value of investments and the income derived from them can fall as well as rise. You may not get back what you invest.

This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.

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