Missed Opportunity
Most of the investment professionals that we follow all seem to agree that the only positive from the recent budget is that it wasn’t as bad as expected. There are some clear potential downsides for our clients who are Farmers, Small Business Owners and those whose pension funds will now be assessed for Inheritance Tax (IHT). Small Business Owners and Farmers now face IHT on assets above £1,000,000. The final details are as yet unclear and we wonder (especially in relation to Farmers) if we don’t see some “rowing back” on these policies in the future.
Pension IHT; setting aside the complicated way in which the government is proposing to calculate the tax due from pension funds, we think the proposals are particularly unfair for those aged 75+ who could face a tax bill of 67% on the balance of their pension fund. For many this will lead to a change in strategy of pension fund withdrawal.
If we can forget the taxing, borrowing and general political nature of Ms Reeves first budget (for now) and look at what she could have done to kick start the UK economy we think we’ll see this as a missed opportunity. If we cast our mind back to the Truss/Kwarteng mini budget, most of us will concede that significant mistakes were made however one of the standout proposals was that of supply side reforms to promote growth. Supply side reforms are economic policies that aim to increase the supply of goods and services which in turn leads to economic growth.
Of these policies in particular regulatory reform; reducing or eliminating government regulation can encourage business to form and expand whilst deregulation; reducing government intervention in the market can create a more efficient environment. We particularly consider our current planning system which has housebuilders and commercial property developers tied up in complex, time consuming and costly regulation. As an example the cost of the Stonehenge Tunnel planning application was £166m, the project has since been shelved, in comparison the world’s longest road tunnel, the Laerdal Tunnel in Norway cost a total of £120m to build. There are clearly issues to be addressed here.
To be fair the government is currently considering their options on planning reform following their recent consultation (closed 24 September 2024) so we could well see some positive developments in this area. And not before time!
A couple of positives (for the economy, not deposit holders) on the horizon are the potential for the Bank of England to reduce interest rates on Thursday (some commentators are suggesting a 0.25% cut) and the Mansion House Speech which the Chancellor will deliver mid November. This is widely expected to pave the way for significant pension reform potentially mandating investment into UK smaller companies. This would be good for UK markets but there are arguments on both sides about mandating investment. Some commentators don’t agree with the approach as they don’t believe the government should be telling people/trustees where to invest, however the UK is a significant outlier having the lowest (pension fund) exposure to domestic equities in the developed world.
The tax benefits of UK pension funds are incredibly generous for example HMRC report that in 2021/2022 the “gross” cost of tax relief was £68.8 billion (income tax and national insurance relief) add into the mix that income and gains generated within the fund are tax free we believe that some form of mandating is to be welcomed. After all, you don’t have to have a pension with these generous tax benefits. You could invest directly and have your gains subject to both income and (the new rate of) capital gains tax.
As further details emerge we will be in touch to discuss the impact of the budget announcements, in particular we will be giving some thought to how the pension IHT changes will impact you all.
This blog is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.
The value of pensions and any income from them can fall as well as rise. You may not get back the full amount invested.
Levels and bases of, and reliefs from, taxation are subject to change and their value will depend upon personal
The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning or Trust Advice.
