Tax-Efficient Wealth Building: Strategies Post-Budget 2024

The 100-day information vacuum between the introduction of the Labour government and the budget was filled by rumours and counter-rumours. While some of the more controversial rumours failed to emerge, it's safe to say it has changed the financial landscape for individuals and companies. The largest tax increase since 1993 means that a proactive approach to tax planning is essential for wealth creation and protection.

Key budget changes impacting wealth building

In total, tax changes in the budget are expected to raise an additional £40 billion, spread chiefly across capital gains tax (CGT), inheritance tax (IHT), and increased national insurance contributions for employers. The knock-on effect will be significant, and many people are now looking to realign their wealth-building strategies in the post-budget era.

CGT adjustments

Even though changes to CGT were less severe than many had feared, we are likely to see further adjustments going forward. There are two aspects to consider:-

CGT rates

• The lower rate of CGT has been increased from 10% to 18%
• The higher rate rises from 20% to 24%

These new rates came into effect on the morning of the budget, 30 October 2024; therefore, there was no time to respond to the changes in the hope of securing lower rates.

CGT allowance

While much of the focus was on CGT rates, it's crucial to remember actions taken by the previous government about the CGT allowance:-

• In the 2022/23 tax year, this stood at £12,300
• In the 2023/24 tax year, it was reduced to £6000
• Then just £3000 from the 2024/25 tax year

It’s fair to say that this is a notable reduction in less than 2 years.

IHT adjustments

There were significant changes regarding IHT, with several previously exempt assets set to be drawn into future estates.

Inheritance tax relief for business

The IHT relief currently protecting business and agricultural assets will be reduced from April 2026, with:-

• Inheritance tax relief capped at £1 million
• Qualifying assets over £1 million will be eligible for 50% relief
• This equates to an IHT rate of 20% rather than 40%

This could impact the timing of succession plans for farms and broader business assets.

Pension assets

In one of the more pivotal changes to tax legislation for many years, it was announced that from April 2027, unused pension pots will form part of your estate for IHT purposes. By 2027/28, 38,500 estates are expected to pay an additional £34,000 in IHT due to pension assets. This mayl also impact drawdown strategies and result in a very different mix of pension and non-pension income in retirement.

National Insurance increase

To suggest that increasing employer national insurance contributions will not impact employees is a little naïve. There are several potential issues to consider, such as:-

• Increased redundancies
• Lower wage rises
• Reduced pension contributions

Higher employer contributions will likely impact disposable income and savings opportunities, making tax-efficient planning even more critical.

Maximising tax efficiency in a changing environment

Ahead of the budget, there had been intense speculation that CGT rates would be removed and gains treated as income going forward. This would have significantly impacted higher-rate taxpayers, but thankfully, so far, the switch does not appear to be on the agenda. However, there is speculation of further adjustments in CGT rates, which could involve increased tax liabilities.

Realising gains before CGT increases

The consensus is that CGT rates will likely change again in the short to medium term, but nothing is set in stone. However, it may be time to consider crystallising some gains, utilising your annual allowance, and switching funds into tax-efficient vehicles such as ISAs and pensions where possible. 

For example, realising a £50,000 gain today at 20%, CGT could save thousands of pounds if the rate is increased or switched to an income tax basis (40% higher rate or 45% additional rate).

Investing in tax-efficient vehicles

Using tax-efficient vehicles will become critical to wealth-building strategies as investors look to protect their investments and reduce potential tax liabilities. There is the opportunity to mitigate tax liabilities by reinvesting into:-

• VCTs
• EISs

Then, as mentioned above, you may also look to direct future funds or reinvest proceeds into:-

• ISAs
• Pension plans

Recently, there has been increased interest in salary sacrifice, where individuals can negotiate enhanced pension contributions from their employer in exchange for forgoing an increase in their salary. There are potential tax benefits for individuals and employers, which may be something to consider if you are in this position.

While pension assets from April 2027 will be subject to IHT considerations, they still offer significant tax benefits and are critical to long-term retirement planning.

Deferring tax liabilities

As well as using VCTs and EISs, there is growing interest in offshore bonds, which offer tax deferral benefits. There is also the opportunity to withdraw 5% of the original investment annually without triggering an instant tax liability. While there will be tax to pay eventually, the structure of offshore bonds gives you a degree of control over when to crystallise future liabilities.

Estate planning and IHT strategies

With protection for agricultural and business assets set to fall under the budget and unused pension assets drawn into your estate from 2027, it’s essential to revisit and update your estate planning and IHT strategies. Aside from considering succession plans and pension withdrawal strategies, there are other topics to discuss with your adviser:-

• Trusts
• Gift allowances
• Leveraging business relief

Even though we may see a reversal of some of these changes under future governments, this is not guaranteed. Therefore, it is important to adjust your wealth-building and wealth-protection strategies based on the various reliefs, allowances, and options available today.

Navigating the post-budget financial landscape

The £40 billion tax take is the largest since 1993, placing more pressure on individuals and business owners. Ongoing changes in CGT rates and the monumental announcement that unused pension assets will form part of your estate (potentially liable to IHT) will impact millions of people. It is, therefore, critical that you review your portfolio and your broader finances as soon as possible.

Expert advice can uncover opportunities and optimise your wealth-building approach in challenging times. Regarding issues such as IHT and pensions, actions taken today could have a significant impact years or even decades down the line. For many people, complacency may be the greatest danger in this post-budget era.

Conclusion

The value of a proactive approach to estate and tax planning has never been more relevant than today. Before the budget, broad tax liabilities in the UK were at levels not seen since the 1940s, and they are expected to hit a historic high of 38% of GDP by 2029/30. The £40 billion budget tax take was the largest since 1993, coming at a time when household budgets, disposable income and businesses are already under immense pressure.

The government has also confirmed an in-depth review of the pension industry with experts concerned about potentially detrimental changes to the pension contribution allowance. Ongoing rumours that future capital gains could be treated as income and taxed appropriately are also in the minds of many investors.

Reviewing your finances with your adviser is essential, as proactive planning can help you navigate tax changes, build wealth efficiently, and secure your family’s financial future.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Pension income could also be affected by interest rates at the time benefits are taken.

Pension savings are at risk of being eroded by inflation.

The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.

Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor.  We recommend that the investor seeks professional advice on personal taxation matters.

The Financial Conduct Authority does not regulate taxation and trust advice.

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