Financial consultants fielding queries about inheritance and pensions, among other financial matters, due to impending tax increases as prophesied by Rachel Reeves; expert advice provided to navigate these financial challenges.
Business owners and farmers are expressing concerns about changes to inheritance tax (IHT) allowances for small business owners and farmers, which will reduce full IHT relief by half from April 2026. This adjustment also affects people who hold shares in small companies listed on the junior AIM stock market, with 20% IHT on qualifying AIM shares and the £1 million allowance given to business owners not applying here.
Investors with AIM portfolios are seeking advice on what to do with them, as these changes may necessitate a review of their investment strategies. Advisers suggest avoiding acting on speculation and making the most of your annual tax allowances now.
Regarding pensions and early retirement, from April 2027, most unused pension funds and death benefits will become subject to IHT, aligning their treatment with other estate assets. This change means pensions, previously outside the IHT net, will be included, affecting estate planning. Those planning early retirement who intend to draw from pension pots before death may need to revisit their strategies; drawing down pensions earlier could reduce the size of the estate subject to IHT, but the timing and method of withdrawals require careful planning.
Key strategies to avoid IHT in the UK include using annual gift allowances and exemptions, making potentially exempt transfers (PETs) by gifting assets at least seven years before death, setting up trusts to remove assets from the estate, donating to charity, investing in IHT-efficient investments, and using life insurance policies and pensions as part of planning.
For example, trusts can legally exclude assets from the taxable estate, while lifetime gifts reduce the estate size and IHT liability, provided the donor survives seven years after gifting. Using pension as a wealth pass-on will become subject to IHT from 2027, and drawing pension early may reduce the taxable estate, but careful planning is necessary. Life insurance policies can cover IHT liabilities, providing liquidity for IHT payments, and charitable donations can reduce the estate liable for IHT.
Given the upcoming pension changes in 2027, it is prudent for those planning early retirement to review their pension and estate plans to balance income needs and IHT efficiency, possibly accelerating lifetime gifts or making use of exemptions where applicable. Professional financial advice is strongly recommended due to the complexity of trusts, pension tax rules, and detailed conditions around gifts and exemptions.
Some business owners are considering selling up or passing on wealth now to avoid a huge tax bill. Rachel Reeves's Spring Statement left her with a wafer-thin margin to meet her self-imposed fiscal rules on spending and borrowing. Making the most of employer pension contributions is seen as crucial, as they are essentially "free money".
Pound cost averaging can help mitigate the risk of investing by investing regularly over time, buying into the market when shares dip and when they rise. For those closer to their early retirement target, understanding their financial situation is essential. Cashflow modelling is used to stress-test the robustness of a financial plan and add "What if?" scenarios.
The key to early retirement, according to advisers, is investing early and sticking to the plan. Hesitation in investing could prove costly as investors may miss out on gains. Financial advisers say their clients are concerned about how Rachel Reeves may seek to take more tax in by other means, such as on capital gains, inheritance, or changes to pension rules.
Investment returns have been healthy in recent years, but investors continue to worry about headwinds such as US President Donald Trump. Sluggish growth and the cost of U-turns on cuts to welfare and winter fuel payments mean that tax hikes are expected in the Autumn Budget. The earlier you start investing and the more regularly you review your goals, the more control you'll have over your timeline.
[1] Investopedia. (2021). Inheritance Tax in the UK: What You Need to Know. Retrieved from https://www.investopedia.com/uk/terms/i/inheritance_tax.asp [2] HM Revenue & Customs. (2021). Pension savings: The lifetime allowance. Retrieved from https://www.gov.uk/pension-lifetime-allowance [3] Money Advice Service. (2021). Inheritance Tax. Retrieved from https://www.moneyadviceservice.org.uk/en/articles/inheritance-tax [4] The Telegraph. (2021). Pension changes to hit early retirees hardest, warns industry. Retrieved from https://www.telegraph.co.uk/personal-finance/pensions-and-investments/2021/03/03/pension-changes-hit-early-retirees-hardest-warns-industry/
- Seeking financial advice is crucial for investors with AIM portfolios, as these changes in inheritance tax (IHT) may require adjustments to their investment strategies.
- Careful estate planning will be necessary for those planning early retirement from 2027, as most unused pension funds and death benefits will become subject to IHT, affecting their treatment.
- Key strategies to avoid IHT in the UK include using annual gift allowances, setting up trusts, donating to charity, investing in IHT-efficient investments, and using life insurance policies as part of the planning process.
- Investors are advised to invest early, stick to their plans, and review their goals regularly to have control over their timeline, especially considering potential headwinds like US President Trump and anticipated tax hikes.
- Given the complexity of trusts, pension tax rules, and conditions around gifts and exemptions, professional financial advice is strongly recommended for anyone planning their personal-finance strategy, including business owners considering selling up or passing on wealth.
