Autumn Budget Report

Following yesterday’s budget, FPC’s Mike Lea, Head of Investments, Nick Evans, Head of Advice, and Paul Welsh, Senior Adviser, deliver their views…

 

2024 Budget Commentary

We are finally through the highly anticipated UK budget and have clarity as to the tax landscape ahead. Some pre-emptive actions proved worthwhile, i.e. crystallising capital gains on non-business assets, whereas others in hindsight required less urgency, i.e. taking pension tax-free lump sums.

The largest tax burden has fallen on employers with a 1.2% rise in national insurance contributions, with little direct impact on the money in employees’ pockets. Most other tax rises impacting high net worth individuals were arguably not as bad as expected, i.e. capital gains tax (CGT), though changes to inheritance tax (IHT) for business and agricultural assets, as well as pension values, require additional consideration.

There is no doubt that the UK’s economic situation is challenging, and the past austere decade has impacted our social fabric. There was little choice but to simultaneously raise taxes for day-to-day spending and also invest more in search of the elusive growth that all countries desire.

The UK has the foundations of a strong economy and society, with embedded wealth, cultural, educational, and legal pillars to prosper going forward. Whatever political side you lean towards, we must hope the measures introduced had been well considered and have the desired impact that the nation will see, and feel, in everyday life quickly.

Below is an overview of some of the key budget announcements:

UK Economy

Our economic consultant John Calverley (Tricio Investment Advisers) comments that in broad terms the budget raises government spending by about £70bn or 2% of GDP, compared with earlier plans, with about 2/3^rd for current spending and 1/3^rd for capital spending. Slightly more than half is covered by increased taxes while the other half will be borrowed.

Over the next two years there are particularly large sums provided to the NHS, and more generous spending is planned for most other government departments.  These choices will leave government spending about 5% higher, as a share of GDP, than pre-Covid. This rise reflects increasing demands for health and welfare spending, as well as public sector salary increases, in the face of very slow GDP growth over the last five years. GDP is up only about 3% from Q4 2019. At the same time, the extra spending will not be enough to radically transform Britain’s public services though it should be able to improve them a little.

The near-term impact of these measures is expected to boost the economy via higher spending, which in turn means a slightly higher inflation rate (rising to 2.6% next year says the Office for Budget Responsibility) and a slightly higher path of interest rates from the Bank of England, as it seeks to offset the fiscal stimulus. Also, with the budget out of the way consumer confidence should pick up. Longer term, this initial boost to the economy fades. The higher path for government investment will raise economic growth fractionally (about 0.1% pa according to the OBR).

Overall, the Budget puts government spending on a higher track without directly adding to taxes on ‘working people’. The rise in borrowing is moderate and is not likely to seriously upset markets the way the 2022 Truss/Kwarteng budget did. But it will do nothing to stimulate faster underlying economic growth which is still stuck around 1.5-2% pa, lower than in the past.

Market Reaction 

Heading into the budget, the UK government 10-year gilt yield had been climbing from a low of 3.7% in September. Just prior to the budget the yield was 4.2%, but this has now risen to 4.4% to reflect the increased public borrowing. Clearly this is a more moderate reaction to the 2022 budget given the forward guidance to markets, but it would not be surprising to see this drift higher.

The OBR forecast for higher short-term inflation of 2.6% next year means the Bank of England will be more cautious in reducing interest rates than it was, and the market is reflecting that in the rising gilt yield.

The value of the pound fell against the Euro and the US Dollar, having trended higher over the past few months in anticipation of the budget. The fact that the International Monetary Fund (IMF) backed the re-calculation of public debt will have calmed fears on international currency markets.

The FTSE 250, which better represents UK Plc, got a modest boost from the budget with certain represented sectors such as construction benefitting from infrastructure promises, and pubs from a cut in beer duty.

The smaller FTSE AIM index of listed companies rose by almost 4% into the close of the day, as the market avoided losing full Inheritance Tax (IHT) relief, which is a perpetual fear. This was the largest rise since April 2020. The London Stock Exchange recently estimated that £6.5bn of investment in AIM companies were held through funds seeking to limit IHT bills.

Employers 

Employer National Insurance Contributions (NICs) will rise from 13.8% to 15%. The secondary threshold by which an employer pays NICs on an employee’s earnings will fall from £9,100 to £5,000. This is the largest tax rise, which is eventually expected to raise £25bn annually says the OBR.

There were concerns that employer pension contributions would become chargeable to NIC but this did not happen. Salary sacrifice arrangements now have additional benefit, though many existing good employers that pass on the whole of the employer saving to employees may be forced to rethink. This will take effect on 6^th April 2025. 

Income Tax  

No extension to the freeze on thresholds beyond April 2028, which will then rise in line with inflation.

Capital Gains Tax 

The most obvious of changes did occur but capital taxes were not aligned with income taxes as some had feared. CGT also remains not payable on death.  The basic rate moves from 10% to 18% and higher rate from 20% to 24%. Surprisingly, existing rates on residential property of 18% and 24% were not changed. Allowances have remained unchanged. This change took place on 30^th October 2024 with any gains crystallised before then paying the lower rate.

Business Asset Disposal Relief (BADR) 

The lifetime limit for qualifying gains remains at £1m, but the rate of CGT payable within that limit on disposal will increase from the present 10%, to 14%, to 18% by 6^th April 2026. There is a window of opportunity to still benefit from the 10% rate as it only applies on disposals after 6^th April 2025 so business owners have been given a small reprieve here.

Inheritance Tax (IHT) 

The freeze on IHT thresholds, including the residence allowance, will be extended by two years until the 2029/30 tax year. Spousal transfer exemptions remain in place.

A significant change however is that Business and agricultural property, over a combined £1m in value, has now become chargeable on death at a 50% reduced rate of 20%. Shares on the listed Alternative Investment Market are also caught here, but they do not benefit from the initial £1m exemption, so have lost 50% of the tax benefit straight away.

Given the previous full exemption rule, it is common for many Wills to pass these assets into a trust, but this may now require review. The obvious question is where the funds will come from to pay the tax on these illiquid assets.

Trustees of discretionary trusts are liable to IHT charges of 6% of the value every ten years, so liquidity may also now be needed in such cases.

Business succession planning may now be top of the agenda and expedite plans to gift shares absolutely, or into trust, as this rule will only take effect from 6^th April 2026 with consultation in early 2025.

Pensions  

There was no announcement regarding contribution levels or tax-free lump sum allowances as was feared.

The big change was bringing the value of pension death benefits back into the estate for IHT. This reverses the rule introduced in 2015 and means pension are once again a retirement vehicle, rather than for intergenerational wealth transfer.

Subject to consultation this will take effect from April 2027, as a result at all forthcoming reviews we will be exploring with clients their current nominations and the range of options ahead of rules becoming clearer.

ISA  

ISA limits are unchanged at current levels of £9,000 for a Junior ISA and £20,000 for an Adult ISA.  The British ISA which was proposed at the previous budget but which had been met with practical resistance from platform providers has been scrapped.

Stamp Duty Land Tax 

The Higher Rate Additional Dwelling (HRAD) surcharge will increase from 3% to 5%.  Companies purchasing residential homes valued over £500,000 will pay an increased rate from 15% to 17%. This will apply to contracts exchanged after 31^st October 2024.

Non-UK Domicile  

One of the more complicated measures is the governments replacement of the concept of Domicile with a new Residence based test for foreign income and gains and for IHT.

The changes will provide full relief on foreign income and gains from UK tax in the first four years of residency and will amend the scope of foreign assets being liable to IHT for ‘long-term’ residents i.e. if present in the UK for 10 of the last 20 tax years. The ‘internationally competitive’ residence-based regime will take effect from 6^th April 2025.

Our Managing Partner, Moira O’Shaughnessy, concludes:

Tax rises were expected, and we were warned that those with the broadest shoulders would bear the strain but there are some changes here that are potentially counterproductive and will have unintended consequences.

The pensions IHT changes are a blow to many FPC clients who have made the responsible decision to save for their retirement over their lifetime and had hoped that any unused pension funds that might remain on their death might pass on without inheritance tax. The practical implementation of the proposals is however yet to be thought through so consultation is now underway. 

The changes to the treatment of businesses and agricultural holdings for inheritance tax purposes is equally concerning and creates really challenging practical issues in terms of succession planning. 

As financial planners our job is to help clients make informed decisions and over the coming months and indeed years (as some of these changes are not potentially effective until April 2027) we will be focussed on reviewing clients’ individual circumstances.  As ever there is no one size fits so we will need to review matters on a case-by-case basis but in terms of priorities:

• Prior to April 2026 – our business owner clients will need to review their share ownership structures,particularly where an exit may be likely in the coming years. There is a window of opportunity to do some estate planning.

• Prior to April 2027 we will help all clients with pension assets review their positions as we need to ensure inheritance tax liabilities are not triggered where that can be avoided.

• At all client reviews over the coming year, we will review pension scheme death benefit nominations.

• It may also be appropriate to review how and when pensions are deployed in retirement as currently, they are often the last pot to access.

As you would expect we will be working closely and collaboratively with our professional partners on these issues and will take a proactive approach.

Thankfully we have time to review clients’ individual positions and this will now form part of all on-going reviews along with consideration of how any other Budget measures impact on planning considerations. 

If you need to discuss any aspect of the Budget or your planning, please do not hesitate to contact us – we will also be issuing further, more in-depth updates on the critical points in due course.

Useful links: 

Spring Budget 2024 (HTML) – GOV.UK

Economic and fiscal outlook – October 2024 – Office for Budget Responsibility

This article is for informational purposes only and does not constitute financial advice.