Transcript

Graeme Blair: Good morning, everyone. Thank you for joining our Goodman Jones webinar of November 2024.

Obviously, today is the anniversary of Guy Fawkes and that was primarily aimed at Parliament. And so it’s a bit of a coincidence that we’ve got the biggest parliamentary interest in the budget in many years. Thank you for those who have provided questions in advance. In the same way that it’s the most anticipated budget in many years, we’ve had more questions come in in advance than we’ve ever had. A

So without further ado, can I introduce the panel? We’ve got Gary White, chief investment commentator at Wealth Management Fund, Charles Stanley. We also have Rena, Richard and Fiona from the tax team at Goodman Jones, who I’m sure you all are familiar with.

So can I at this point pass over to Gary for the economic outlook from the budget?

Garry White: Good morning, everybody. So Labour has finally set out its door for the next five years of government. Rachel Reeves has delivered its first budget, which has given us some idea of how it’s going to try and meet the challenge of kickstarting sustainable growth at the same time as widening the fiscal taps to create the scale of public services promised in its manifesto.

As promised, she delivered a material increase in taxation, effectively the biggest tax rise since those announced in 1993 by Conservative Chancellor Norman Lamont, who was infamous for slapping VAT on domestic fuel bills. Lamont’s budget created such a furore that it turned into “Lamont’s Lament,” and a few weeks later, he was sacked and replaced by Kenneth Clarke. But no such fate lies in store, really, for Rachel Reeves. The lion’s share of her budget is going to be funded by employers through a rise in national insurance contributions. This single change is actually significant, as it’s going to generate, we were told, £25 billion of the £40 billion needed to fund the increased spending, which is projected to average £70 billion a year over the next five years.

The extra cash needed to meet Labour’s manifesto commitments works out to about 2% of GDP each year. Now, because businesses are being targeted, and with the inflationary problems we’ve seen over the last couple of years, it’s likely that these costs will be passed on to workers in the form of lower pay rises and maybe even fewer positions. So there is going to be some pass-through of this as well.

Two-thirds of this increased spending has been earmarked for the government’s day-to-day operations, with the largest increases directed toward education and the NHS. However, one-third is going to capital spending or investment in growth, which is the main thrust of this new government. This really means there’s going to be a significant shortfall between the Treasury’s tax intake and the outflow in terms of spending. This gap will be funded by a sharp increase in UK government debt issuance, meaning borrowing levels over the term of this government will be materially higher.

But this is hardly a surprise for a Labour government. Checks and balances meant to ensure spending does not get out of control have been changed, goalposts have been moved, and new fiscal targets have been introduced. These include a new measure of debt that accounts for assets generated by government investment, essentially allowing the government to borrow for growth investment but not for ordinary government day-to-day activities. The government is also now targeting its current budget balance and debt, as measured by a data point called the public sector net financial liabilities. This needs to be falling by the fifth year of the forecast, but this horizon will gradually shorten over the next two years, so that from 2026 to 2027 onward, the government would need to meet targets for the current budget balance and public sector net financial liabilities three years ahead.

Both these changes are actually quite sensible, though, as cynics might note, it’s the ninth change of rules in 16 years, meaning we could have more changes ahead if things don’t work out as currently planned. A long timeframe of five years provides plenty of opportunities for the government to make adjustments by penciling in dubious future tax and spending plans. Thus, it’s a good thing that they’ve shortened this timeframe. Even with a planned increase of £70 billion a year, the Independent Office of Budget Responsibility calculated that the Chancellor is on track to stay within these new targets with a significant buffer, at least until the end of its term in office.

So what were the impacts on markets of Labour’s first budget in this government? Well, we were spared the national embarrassment of a “Liz Truss moment” when her tax giveaway was neither properly funded nor endorsed by the OBR. In August 2022, on the day her Chancellor, Kwasi Kwarteng, delivered the speech, gilt yields leapt by 33 basis points and went on to rise 100 basis points over the next three trading sessions. Such a sharp rise in gilt yields, or the return that investors expect on government bonds relative to the risk of repayment, has many implications for the people of Britain.

If government borrowing is to increase, many more gilts will be needed, and more investors will need to be willing to buy them. A sharp increase in the issuance of government paper usually causes a spike in yields, meaning an increase in borrowing costs for businesses, and a rise in the cost of servicing mortgages and other personal loans for individuals. This crimps profits at companies, reducing funds for future investment, and limits disposable income for the British public, which also impacts property values. All of these factors combined can cause a country’s economy to stutter and potentially crash.

So what impact did Ms. Reeves have on the gilt markets? In fact, financial markets absorbed the new measures pretty well. Although she increased investment and changed fiscal rules, gilt yields were notably higher, but not excessively so. The move was more a reflection of both an increase in gilt issuance and likely changes to the Bank of England interest rate outlook. This sort of fiscal spending is moderately inflationary, prompting a rethink there, but UK treasury yields also tend to follow US treasury yields. With the US election today, both candidates are proposing significant spending plans, which has driven treasury yields up.

The relative calm on budget day did not last long. The market initially took the Chancellor’s £40 billion in tax increases in stride, but, as always, the devil is in the detail. Gilt yields jumped in the following days as the market digested the implications for UK borrowing, particularly since many of the tax rises were delayed while the spending plans would kick off relatively soon, causing an increase in volatility.

Other factors have also spooked the markets. Debt issuance is expected to rise to nearly £300 billion this year, the second-highest level on record. Reeves also made adjustments to fiscal rules that could have risked damaging her fiscal credibility, given that the rules have been changed 16 times in nine years. But she managed to avoid this, thanks to very skillful media management ahead of the budget. Cleverly, a number of “kites” were flown, with more extreme measures like a wealth tax proposed but ultimately not implemented. This allowed for a well-briefed budget that avoided surprises.

Investors were also calmed by news that Ms. Reeves was on track to meet both her fiscal rules early, with figures from the OBR suggesting that net financial debt will fall as a portion of GDP by the 2027–28 financial year. So, after the turmoil of Liz Truss’s tax giveaway, the market reaction was pretty muted. This should be a welcome relief not only for Labour but for all of us attending this webinar.

Graeme Blair: Thanks, Gary. That was a very, very interesting canter through the economics and obviously the economics filter down to the business community and therefore the first question I’ve seen posed is in respect of businesses, and it reads, “I have a small business and employ five people, will the increase in employers allowance compensate me for the hike in national insurance?: And I think I’ll that one to Richard, please.

Richard Verge: Thank you, Graham. Morning, everyone. That’s a good question. It’s quite clear that in order to raise the amounts of money Labour said they need, 40 billion plus, one of the big taxes was going to have to rise, and it was employers’ National Insurance. This was pretty much the only option left following the manifesto pledges not to raise taxes on working people.

So what has risen? Let’s look at the details. The employer rate has gone up to 15%, which is a 1.2% increase. Additionally, the threshold at which it starts to be applied has been lowered from £9,100 to £5,000. These changes take effect from April next year. To provide some relief for small businesses, the employer’s allowance has increased from £5,000 to £10,500.

What is the employer’s allowance? Essentially, it’s a type of credit that small businesses can offset against their employers’ National Insurance contributions. This offers some help for very small businesses, though it’s not available to all. For example, single-person companies cannot claim it. This limitation likely prevents individuals from setting up a company just to access the employer’s allowance. Although it’s hard to imagine many people doing that, those companies with only one director/employee can’t receive the allowance.

Previously, the employer allowance was only available to small or medium-sized businesses; any employer with a National Insurance bill over £100,000 couldn’t access it. Now, that restriction has been removed, and it’s available to all businesses. I’m not sure why a large business would find this significant, since £10,500 isn’t likely to impact them much, but perhaps monitoring this was becoming too challenging. The allowance is also available to charities.

Now, to go back to the question: what difference does this make for our example of a business owner with five employees? The answer really depends on how much they’re paying their staff. For instance, if an employee earns the new increased minimum wage of £12.21 per hour and works a 35-hour week, their annual income would be around £22,000. At this wage level, an employer could employ up to seven people at that rate and actually be better off with the increased employer allowance.

However, if we consider an average salary of £50,000 per year for staff, the employer can only support five employees before starting to be worse off. So, in reality, the very small businesses with just a few employees are actually protected, and in some instances, they may even be slightly better off.

Graeme Blair: Thanks Richard. It was interesting what Gary said about message management and some of the sort of reliefs that were side when things weren’t changed. And of course for the small business there was concern about national insurance on pensions and that is something that hasn’t been enacted. So you know, that’s a good thing.

Sticking to the sort of the general theme of businesses, the next question we’ve got is “I’m a sole shareholder in a family trading business which has been operating since 2010. I’m also a majority shareholder in a farming business which holds farming land and has been let to a farmer since 2014. I’ve previously been advised I don’t have to pay IHT on my debt on these shareholdings. I understand that this has now changed. What can I do to reduce my IHT exposure?” So there’s an IHT question with a business slant. So Reena, I think that’s one for you.

Reena Bhudia: It looks like you would potentially qualify for two reliefs: Business Property Relief (BPR) on your family trading company and Agricultural Property Relief (APR) as a majority shareholder in the farming business. Currently, both reliefs are available at 100%, with no cap. However, starting from April 6, 2026, every individual will have a combined BPR/APR allowance of £1 million.

What this means is that you can only claim 100% BPR/APR relief on shares up to the first £1 million, prorated between the two shares at market value. For any value above £1 million, the relief will only be available at 50%. If you have assets that already qualify for the 50% relief—like assets you own personally but are used in the trading business—this 50% relief will still apply and will not count against your £1 million allowance.

Additionally, you still have your nil rate band allowance of £325,000 to use against your estate, which has been frozen until 2030, provided it hasn’t been used within the seven years before your death.

Now, what are your options for reducing the inheritance tax (IHT) exposure? In terms of succession planning, this change could encourage more lifetime gifting, as there’s less incentive to hold the shares until death. Since it’s a family trading business, you might consider introducing more family members into the business by gifting shares. Although this would be a potentially exempt transfer, as long as you survive seven years, there would be no tax due. As a trading business, there’s also potential to claim Capital Gains Tax (CGT) holdover relief.

Once the seven-year period has passed, both the donor and the donee each have their own £1 million BPR/APR allowance. In effect, this strategy maximises the available reliefs by bringing more people into the business.

It’s also worth noting that, unlike the nil rate band allowance, any unused BPR/APR allowance cannot be transferred to a surviving spouse. This means it’s a “use it or lose it” allowance. Consequently, many people may need to review their wills. For instance, if your will currently transfers all assets to a surviving spouse, you might want to amend it so that any unused APR or BPR allowance is used upon death, with the shares passing to a non-exempt beneficiary. The same consideration applies to farming business shares. However, be cautious not to gift too much, as maintaining a controlling interest is necessary to qualify for APR on farming shares. Giving away too much could mean losing APR altogether.

There’s significant concern that by limiting these reliefs, many businesses might struggle to continue due to the added IHT liability, which goes against the original purpose of BPR and APR—to allow businesses to continue after the owner’s death. Personally, I think the £1 million limit is too low. STEP, a professional body, is calling for an increase in the APR threshold, but there hasn’t been any comment yet on the BPR limit. We’ll have to wait to see if further changes arise before the new legislation is introduced.

Graeme Blair: Thanks, Reena. Richard, I think I’ll put the next one to you. It’s along the same lines as Reena’s, but it’s more a lifetime matter rather than a death matter. It says “I was planning to sell my business and retire within the next few years. What effect will the changes to capital gains tax have on me?”

Richard Verge: Thank you, Graham. Yes. What’s changed with capital gains tax?

There was a huge amount of discussion before the budget, and people were worrying about rates going up to 45%. Many actually undertook some transactions in anticipation of the budget. But what’s actually happened is that we have seen increases, though not as high as some were predicting. The basic rate of capital gains has gone from 10% to 18%, and the standard rate has increased from 20% to 24%. These changes took effect immediately from budget day.

One interesting point is that for basic rate taxpayers, the difference between income tax and CGT is now only 2%. For someone paying the higher rate, it’s a 16% difference, and for additional rate payers, it’s a 21% difference. This means that the larger the gain, the greater the difference in tax between income tax and CGT.

Another point to consider is that many countries differentiate between short-term gains and long-term gains. Short-term gains are often treated more like income, while long-term gains are viewed as investments. Historically, when CGT rates were around 30%, we had indexation relief to account for inflation. Now, as rates increase again, there’s no inflation protection, which means that in some cases, CGT might be effectively taxing inflation on longer-held assets—a scenario that doesn’t feel entirely fair.

Our questioner will be affected by the increased rates when they come to sell. They’ll also feel the impact of changes to the rates applied to business asset disposal relief, often still called entrepreneur’s relief. Assuming they meet the qualifying conditions for this relief when selling, its value will be lower than before. Currently, the rate on the first £1 million of gain is only 10%, with the standard 20% rate applied thereafter. Going forward, from April 2025, the £1 million relief is retained, but the tax rate will increase to 14%. Then, in 2026, it rises to 18%, with gains over £1 million taxed at the new rate of 24%. This reduces the relief’s value significantly.

While it’s still beneficial—saving £40,000 on a £1 million gain in 2024-25 and £80,000 after that—it’s not as substantial as when the limit was £10 million, yielding a £500,000 saving.

Additionally, the budget introduced comprehensive anti-forestalling measures. These prevent actions taken immediately before the budget to take advantage of CGT rates. Since the taxing point for capital gains is usually on the exchange of contracts, any contracts exchanged just before budget day but completing afterward will be taxed at the new, post-budget rates rather than pre-budget rates.

Graeme Blair: Thanks Richard. So I think we’re, we’re slightly all depressed at the moment because Reena’s telling us that if we hold business assets to death we, we pay more tax. And Richard’s telling us that if we, if we sell our businesses during lifetime we pay more tax. It’s interesting, I mean obviously I’ve been around for a few years and it’s not often that, that any government sort of gives you a forewarning of what future tax rates may be in the capital arena. Because these taxes are the vendor or the donor has a bit of flexibility as to when they incur the tax. So it’s actually interesting that tax rates are going to go up for business asset disposal relief over a couple of years. And there is a cynical view that says actually what the government are trying to do is to, is to increase their tax take by pre warning people that if they don’t sell now they will pay more tax in the future and therefore they might not sell for as higher price but they might actually have more take home return. And of course that generates capital gains tax for the government.

We haven’t heard from Fiona yet, so I’m going to deliberately change tax a little bit and, and bring in a question that is right up her street. It’s a very short question, but I suspect it might have quite a complex answer. “I’ve heard that the domicile is being abolished. Can you tell me what is happening on this?” Over to you, Fiona.

Fiona Clark: Good morning, everyone. Good to be here. Thank you for the question.

This is absolutely correct. The 300-year-old concept of domicile is going to be abolished with effect from the 5th of April next year. Instead, we’re moving to a residence-based system. The proposals we have now are broadly in line with the original system that Jeremy Hunt put forward back in March 2024.

Now, you may be aware that there were consultation events with HM Revenue and Customs before the election. Professional bodies and other interested parties were invited to meet with HMRC and the Treasury to discuss the proposals. However, it seems that not much listening took place, as we’ve essentially ended up exactly where Jeremy Hunt initially suggested we might be in March 2024. Labour had put forward slightly different proposals in July after the election, and additional consultations were held over the summer, but nothing significant has changed.

When looking at these changes, we often hear about non-doms potentially leaving the UK, and there is some debate about whether people will actually go. But first, let’s clarify what the proposals mean. Under the new regime, UK residents will be taxed on their worldwide income and gains in the year they arise, regardless of whether they have come to live in the UK from overseas with no UK heritage or connection. They will be taxed in the same way as those who have lived here all their lives.

There will be some transitional measures for new residents and provisional arrangements for non-domiciled individuals who claimed the favourable remittance basis of taxation prior to April 2025. However, going forward, the system will be entirely based on residence: if you’re resident here, you’ll pay tax on your income and gains, no matter where they arise globally, in the year they arise.

Additionally, there is a proposal to implement a new residence-based system for inheritance tax. Under this, once individuals have been resident in the UK for at least 10 out of the previous 20 years, their non-UK assets will also fall within the IHT net. UK assets, of course, will be subject to inheritance tax from day one. This IHT charge will also apply to offshore trusts settled by individuals who have been UK residents for at least 10 years, effective from the 6th of April 2025. So, offshore trusts, even those settled long before individuals moved to the UK with non-UK-generated wealth, will become taxable once the settlors have been UK residents for over a decade.

This is unwelcome news for long-term resident non-doms. Many had hoped for some softening of Jeremy Hunt’s initial proposals, particularly in regard to inheritance tax and offshore trusts, but based on the draft legislation, it appears that grandfathering provisions for such trusts will not be provided.

For those with longer memories, I’d ask you to think back to 2008 when we saw significant changes to the non-dom regime. The final legislation ended up being quite different from the initial draft. So, there is still some scope for adjustments to the current draft, and professional bodies will likely make representations, particularly concerning the inheritance tax’s application to non-doms and their offshore structures. However, whether these representations will be effective remains to be seen.

In 2008, the Labour government softened its stance, but today’s political landscape is different. These changes appear more ideologically than economically motivated, with perhaps stronger union influence than before. The government faces difficult choices, as Rachel Reeves has acknowledged, and needs to raise funds where possible. However, the question remains: do they really want to kill a potential “golden goose”?

Many non-doms who are particularly concerned by these changes are wealth creators who contribute significantly to the UK economy. Will they actually leave? I’ve spoken to some who have already left, and others say they will if these provisions take effect as planned. Wealthy individuals and family offices with £50 million to £100 million in assets have also reconsidered plans to move to the UK due to these changes.

Typically, people don’t make relocation decisions based solely on tax, and as advisers, we wouldn’t suggest they do. However, there’s a sense, especially post-Brexit, that the UK may not be as welcoming as it once was. With an increasingly high tax burden, crime rate concerns, VAT on private education, and overseas competition in education and tax regimes (in Italy, Cyprus, Greece, Malta, etc.), non-doms have viable alternatives.

So, will they stay or go? We’ll have to see where the legislation ultimately lands. But, certainly, the concept of domicile as it stood will be removed from the statute books from next April.

Graeme Blair: Thanks, Fiona. It’s interesting you say that tax isn’t a driver on immigration or emigration and I think ultimately that is the correct statement. But I do remember a very, very wealthy non domicile saying to me, I didn’t come to the UK for your weather. The political stability, the education system and the tax system were drivers. So maybe thoughts are changing.

I’ll keep with you, Fiona, because next question is straight up your street and it reads: “I came to live in the UK five years ago and have claimed the remittance basis of taxation since my arrival to shelter my overseas income and gains from UK tax. I’ve heard that I can now bring in those shelter income engaged to the UK at a minimal tax cost. Can you tell me more about this?”

Fiona Clark: Absolutely. The question here has been raised by someone who has been living in the UK for five years now. There is a particularly favourable regime that applies to individuals in their first four years of residence. Unfortunately, our questioner has been here too long to benefit from that, but there is still some relatively good news.

People who have been UK residents for more than four years and who claimed the remittance basis prior to 6 April 2025 (which our caller has) will have the option to use what’s called a “temporary repatriation facility.” This facility allows those who used the remittance basis before April 2025 to bring some of their sheltered overseas income and gains to the UK at attractive tax rates. For the 2025-2026 and 2026-2027 tax years, the rate will be 12%. This is a significant benefit, considering some may have otherwise faced tax rates up to 45%. For a third and final year, 2027-2028, individuals can use the facility at a slightly higher rate of 15% to bring in previously sheltered income or gains.

The regime applies to unremitted income and gains arising personally, such as dividends from overseas shares, interest on overseas investments, and gains from the sale of non-UK assets. It also applies to income and gains from non-UK resident trusts and companies prior to 2025 and can cover income and gains that match benefits received by a trust beneficiary during the temporary repatriation period.

There are some caveats to note. No relief will be given for foreign tax paid on remitted income or gains, and individuals can choose how much previously sheltered income or gains to designate under the temporary repatriation facility; it’s not necessary to designate everything. Also, these remittances don’t need to be reported to HMRC when they’re finally brought in, but the designations of income or gains must be reported on the UK tax return for the year in which the facility is used.

For people moving to a worldwide basis of taxation from April 2025 (like our caller), there is also an opportunity to rebase foreign assets for capital gains tax purposes. If our caller has held assets since before April 2017, they can adjust the cost basis of these assets to their value as of April 2017, which can reduce the taxable gain when the assets are eventually sold. This rebasing option only applies to assets kept outside the UK between March 2024 and April 2025. The rebasing is automatic but can be disclaimed if the April 2017 value is less than the original purchase price.

The government chose April 2017 as the rebasing date, a year used in a previous rebasing opportunity, instead of April 2019 as was initially suggested.

So, there are two attractive options here for our five-year resident caller to consider in the years following this change.

Graeme Blair: Thanks Fiona. I’ve got another question for you, but I think what I’ll do is I’ll slip one in for Richard first because it’ll give you a bit of a break. Richard, “I’m a private landlord and this is my full time activity. The budget seems to have singled me out again. Please can you explain the changes and is there worse for the landlords to come?” And so that’s an interesting one because it’s looking at what may have come out of the budget but asks you to get out your crystal ball and maybe talk about the future.

Richard Verge: Let’s take a look at the history and current state of private landlords. It’s been a while since the government actively encouraged private landlords; buy-to-let was once considered beneficial, but recent budgets have steadily removed most advantages. Two key issues for landlords were raised in this budget. Firstly, the end of the Furnished Holiday Lettings (FHL) regime was confirmed, and secondly, there was a hike in the Stamp Duty Land Tax (SDLT) rates for additional property purchases, increasing from an additional 3% to 5%.

This increase in SDLT isn’t insignificant; the government expects it to raise an extra £300 million by 2029-2030. The higher SDLT rate affects individuals buying additional properties and applies to any residential property purchased by companies, even if it’s their only property. With rates now going up to 17%, buyers are facing considerable costs. For example, a £1 million property that previously attracted £71,000 SDLT will now require £91,000.

It’s also worth noting that the SDLT threshold, raised to £250,000, will revert to £125,000 in April 2025, although this was previously announced and isn’t new to this budget.

Now, turning to Furnished Holiday Lets (FHL). For many, managing property is effectively a full-time job, but HMRC has generally not treated property income as a trade and, as such, hasn’t extended trading reliefs to it. FHL was an exception, allowing certain reliefs, including capital allowances, full interest expensing, and potential Business Asset Disposal Relief on sale. However, these benefits will cease from April 2025, although transitional provisions are in place: landlords can use any accumulated pool of capital allowances and retain a three-year window for Business Asset Disposal Relief even if the FHL regime ends.

These two budget changes add to an already challenging environment for private landlords. Looking forward, is there more to come? The answer may be yes, as landlords, like all traders, will soon face increased compliance burdens under Making Tax Digital (MTD). From 2026, landlords with rental income over £50,000 will be subject to MTD’s quarterly reporting requirement, and by 2027, this will apply to landlords with rental income over £30,000. This additional compliance will require preparation and adaptation, adding yet another layer of complexity for landlords in the near future.

Graeme Blair: Okay, thanks Richard. Fiona, I pre warned you that the next question would be put to yourself and it goes as follows. “I’m resident overseas at the moment. I’m planning to come to work in the UK in June next year. I’m looking to stay for maybe five years. I’ll continue to receive income and gains overseas whilst I am living in the uk. I’ve heard that I can make a claim to shelter my overseas income and gains from UK tax whilst I’m living in the uk. Is this correct?” So I think there’s a flow on from your previous caller as you described them and their questions. So I’ll let you ponder this one.

Fiona Clark: Yes, there’s some good news here. For individuals coming to work full-time in the UK, any UK employment income will be taxed in the usual way through PAYE. However, there is a beneficial regime that applies to new UK arrivals within their first four years of residence—often called the FIG (Foreign Income and Gains) regime.

Initially, this regime was proposed for three years but has been extended to four, provided the individual hasn’t been a UK resident in the past ten years. Through this regime, new arrivals can claim 100% relief from UK tax on overseas income and capital gains for up to four years. To access this relief, they’ll need to make a specific claim on their tax return, specifying the amount of income and/or gains to be sheltered. The benefit of this flexibility is that they can choose to shelter income, gains, or both.

However, any overseas income or gains that aren’t included in the FIG claim will be taxable at the individual’s standard UK tax rates. It’s crucial to make the claim and quantify the amounts to be sheltered, as unclaimed amounts will automatically be taxed. No annual charge is required to access this FIG assessment, but the individual will forfeit both the personal allowance for income tax and the capital gains tax (CGT) annual exempt amount during the years they make a FIG claim, whether they’re claiming for income, gains, or both.

Foreign losses during FIG claim years won’t be allowable, and the regime extends to income and gains from personally held overseas assets, such as dividends and interest, as well as distributions or matched gains from non-UK resident trusts.

This FIG regime is advantageous for the first four years, allowing significant tax relief. However, after this period, the individual’s worldwide income and gains will become fully taxable in the UK based on their resident status.

Graeme Blair: Thanks, Fiona. That’s certainly a comprehensive answer. And what it really shows is a lot of pre immigration planning is still available and that can lead to some quite substantial tax savings.

Reena, I don’t think I’ve asked you a question in the last few minutes, so let’s change that. Now, “I have a pension pot which is written into trust and will eventually pass to my children on death. How is my pension impacted by the new rules?”

Reena Bhudia: There is a bit of a mix here with some good news and less favorable developments. First, you’ll still be able to make pension contributions and benefit from income tax relief on them—no changes there. However, from 6 April 2027, pensions will no longer be protected from inheritance tax (IHT). After this date, pension pots will form part of the estate for IHT purposes on death. This shift stems from the government’s view that pensions were increasingly being used for wealth transfer without IHT, rather than strictly for retirement funding.

Under the new plan, the pension provider will deduct any IHT due from the pension pot and remit it directly to HMRC. A consultation is open until 22 January to gather public input on the process for implementing these changes.

Another consideration: if you pass away after age 75, your pension will also be subject to income tax when inherited. For beneficiaries who are higher-rate taxpayers, this could mean a reduction of up to 67% of the pension pot when they withdraw funds. Additionally, this change may impact the availability of the resident’s nil-rate band allowance of £175,000. To qualify, the net estate must not exceed £2 million. With pension pots now included in estates, fewer individuals may qualify for this relief.

To mitigate these impacts, consider drawing 25% of your pension as tax-free cash, which remains available. If you withdraw additional funds, they will be subject to income tax, but if your income needs are low, you could incur minimal tax. Once withdrawn, if you don’t need the money, you could gift it, potentially achieving immediate IHT relief if it’s part of surplus income.

In summary, it may be prudent to draw on your pension during your lifetime, either spending or gifting as you go, rather than holding it within the pension for inheritance. This approach could help reduce the tax burden for your beneficiaries.

Graeme Blair: Reena, I think pensions is the one issue that has probably generated more debate in the press over the last weekend than possibly any other. And it’s interesting that you make the suggestion about the 25% tax-free allowance and then maybe use the gifting of income legislation. But I think what people need to remember is effective tax rates, because your suggestions are obviously very sensible.

But we could potentially get ourselves into the world where people face a 45% income tax on pensions simply to avoid 40% inheritance tax. And that seems slightly counterintuitive to me. Obviously, we can’t give investment advice, but there’s another part of my brain that says, well, if you’re just withdrawing it from your pension and you’re not really going to give it away and you’re not necessarily going to spend it—because maybe you’ve earmarked it for care fees or whatever—well actually, wouldn’t it be better just to have it rolled up in a tax-free environment rather than take it out of the tax-free environment?

So, you know, there’s lots and lots of moving parts here, and I think that really shows the benefit of professional advice. It also highlights the fact that there is no one-size-fits-all approach in this world.

I’ve got one more question because I’m very conscious we’ve got three minutes to go, and I tend to finish on time. I had presented a question to individuals, but I’m going to change it here because I think this one, if I start with you, Fiona, and then we can move on to Reena, as it covers a variety of areas. The question reads as follows:

“I’m a UK resident non-domicile. I’ve lived here since 2014. I set up an offshore trust prior to my arrival and I took advice on that myself. My spouse and minor children are all beneficiaries of the trust. I understand there are going to be changes to how offshore trusts are taxed. What will this mean to me?”

Fiona Clark: Sure, I’ll keep this quick. Unfortunately, it’s not great news for our UK resident settlor. The existing trust protection rules that meant that he was not automatically accessible on income and gains arising to the offshore trust will be removed from 6th of April.

So he will, as a UK resident settlor who’s been resident for more than 10 tax years, be subject to tax on the income and gains arising to the trust from 6th of April 2025 in the year when they arise.

Any distributions to his wife and children as beneficiaries from April 2025 can be matched with any undistributed income and gains that are still in the trust dating back to before April 2025.

And so it’s not great news for him from an income tax and capital gains tax point of view.

Reena Bhudia: So the IHT position of a trust is generally based on the domicile status of the settlor at the time of the settlement. On the basis that this trust was set up, which only holds foreign assets, it would have been set up as an excluded property. So it’s outside the scope of UK IHT.

Two things are now happening which will affect the trust. First, the concept of domicile is being abolished and the new long-term residence-based system is being introduced, which has already been discussed. Second, the IHT position of the trust is no longer fixated on the status of the settlor at the time that the trust was set up. Instead, what’s going to happen is it’s going to be more fluid and will change as the settlor’s long-term resident status changes.

So what do we mean from an IHT perspective? Well, assuming it’s a discretionary trust, the trust could be potentially subject to 10-year and exit charges because the settlor’s position is now going to be assessed at the relevant chargeable events.

For instance, let’s say this trust was created in 2013. The next 10-year anniversary is going to be 2033. Assuming the settlor continues to live in the UK, the settlor is going to be long-term resident as at 2033.

So what’s happened is you’ve gone from a trust which was originally excluded property and outside the scope of UK IHT, and it’s now taxable under the relevant property regime rules and will be subject to a maximum 6% IHT charge. Also, if the settlor then subsequently ceases to become long-term resident, there will also be an exit charge that will arise at that point as well.

In this case, the settlor is also a beneficiary of the trust. So we also need to think about the gift reservation of benefit rules. But in this case, because the trust was created before 30 October 2024, the gift reservation of benefit rules won’t apply. However, they will apply to new trusts that are created after this date.

Just a final point: if the settlor dies and the trust is still in existence, then the IHT status of the trust going forward will be based on the settlor’s long-term resident status at the time of his death.

So a planning point, I guess, would be to maybe look at your client’s excluded property trusts and, if they are about to fall into the UK IHT net, then the trustee should consider distributing assets out of the trust before the settlor becomes long-term resident to avoid the IHT charge. Obviously, there will be income tax and capital gains tax to consider.

Personally, I think the rules for the trust are complex as it is, and although I can understand why they’ve introduced these measures, in my opinion, I just think it’s added another layer of complexity both within the legislation and the calculation. And even for the settlor, who’s going to have to be tracking their resident status whilst they’re alive.

Graeme Blair: Thanks, Reena. In the world of tax, one likes certainty, and certainly the budget seems to have provided a bit of certainty in various areas, whether it’s tax rates or tax rules.

The thing that made me shudder on Reena’s summary is the word “fluid,” and the extent to which a decision may have a fluid outcome is quite worrying.

Look, it’s two minutes past 11. We promised an hour. We don’t intend to hold you from your good days.

So I think the first thing I need to do is thank the panelists and then secondly, thank you, the audience, for joining us. We’ve obviously tried to cover off as many questions as we can. We haven’t got to all of them, and we had a couple come in live during the presentation that we will try and reach out to the posers individually if they’ve identified themselves.

As I said earlier, this has been recorded, and links will be provided in due course. So thank you very much, ladies and gentlemen, and have a good morning.