Inheritance Tax Update
Many business owners may be concerned about the October 2024 budget changes, particularly the changes to national insurance amongst other things. The announcement that pensions will fall into their estate for inheritance tax (IHT) purposes starting in 2027 may not have been on their radar. Possibly, this announcement could be another factor deterring them from considering pensions. While this adjustment is significant, pensions remain an invaluable tool for extracting money from your business in a tax-efficient manner. Importantly, IHT concerns can be addressed separately, ensuring pensions continue to play a central role in your financial planning strategy.
Budget Highlights Affecting IHT
The budget introduced key changes that will impact financial planning:
- Pensions Will Be Subject to IHT from April 2027: pension funds will be included in an individual’s estate for IHT calculations.
- Frozen IHT Thresholds: The nil-rate band remains at £325,000, and the residence nil-rate band at £175,000. With rising property values and inflation, more estates are likely to incur IHT.
Why Pensions Are Still a Vital Business Tool
Despite the changes, pensions continue to offer exceptional benefits for business owners:
- Tax-Deductible Contributions: Contributions to pensions made through your business are tax-deductible, reducing corporation tax liabilities. This makes pensions an efficient method to extract profits and invest for the future.
- Tax-Efficient Growth: Pension investments grow in a tax-advantaged environment, enabling you to build substantial retirement savings while minimising tax burdens.
- Control and Flexibility: Pension schemes allow for customized investment strategies and controlled access to funds, typically from age 55 (rising to 57 in 2028).
- Retirement Wealth Planning: Pensions remain one of the best ways to secure financial independence in retirement, ensuring long-term stability.
Separating IHT Planning from Pension Strategy
While pensions will be included in estates for IHT purposes, this does not diminish their effectiveness as a business tool. IHT concerns can be managed through additional strategies, such as:
- Lifetime Gifts: Reduce your estate’s taxable value by gifting assets to family or friends. These gifts can become IHT-free if you survive for seven years.
- Trusts: Trusts can help preserve wealth and manage IHT exposure while giving you control over asset distribution.
- Life Insurance in Trust: A life insurance policy written in trust can provide funds to cover IHT liabilities, safeguarding your beneficiaries’ inheritance.
Maximising Pensions for Business Owners
Integrating pensions into your business strategy ensures you make the most of their benefits. Here’s how:
- Maximise Contributions: Fully utilize your annual allowance (£60,000 or more with carry forward options) to reduce your business’s taxable profits while growing your retirement fund.
- Incorporate Long-Term Planning: Pensions are not just for retirement; they are a powerful tool to align business profitability with personal financial goals.
- Regular Reviews: Periodically assess your pension contributions, investment strategies, and overall financial plan to stay aligned with regulatory changes and your evolving needs.
Conclusion
The inclusion of pensions in estates for IHT from April 2027 marks a significant policy shift, but it doesn’t undermine their value as a business and retirement planning tool. By addressing IHT concerns through separate strategies and leveraging the tax advantages of pensions, business owners can create a robust and efficient financial framework.
This article is written by Sam Kmieciak, Chartered Financial Planner, Aegis Financial Planning Ltd, by invitation of Hargreaves Owen Chartered Certified Accountants based near Baldock, Letchworth and Hitchin.
For a free, no-obligation consultation, please contact Sam via or 07850 746939.