Budget 2024 – Pension Schemes & Three Key Changes

Following on from the 2024 Autumn Budget on 30^th October 2024, the Chancellor unveiled some reforms to pensions and tax, that may affect you and, in particular, your pension planning. A brief roundup of these changes is summarised below:

Inheritance Tax (IHT) & Pension Pots

Currently, defined contribution pensions are not included as part of your personal estate, and therefore, not included in the total valuation of your estate for IHT purposes. Current pension legislation prescribes that:

• If you die before age 75: your pension can be inherited tax-free.
• If you die aged 75 or over: your beneficiaries will pay income tax on what they inherit at their personal tax rate (for example 20%, 40% or 45%).

However, it was announced during the Budget, that with effect from April 2027, all defined contribution pension funds will now form part of your estate, and thus the value of these pension pots, will be added to your overall estate to determine whether IHT is payable. Any remaining pension funds may therefore be subject to IHT at 40%, but this will depend on who the beneficiary is and whether the value of the estate, including the pension fund, exceeds the IHT allowances and reliefs available

In addition to IHT where death occurs after age 75 income tax will still be payable by the beneficiary. The proposed changes therefore give rise to potential tax rates on the pension in the range zero to 67% depending on the scenario. For example:

1. If death occurs before age 75 and the beneficiary is the surviving spouse or civil partner or the total value of the estate including the pension does not exceed that available allowances and reliefs, then no tax will be payable
2. If death occurs after age 75, the whole pension is subject to IHT, the beneficiary is not the spouse or civil partner and pays income tax at 45%, then the effective tax rate is 67% (40% + 45% of the remaining 60%)

The IHT tax free threshold was also frozen at £325,000 until 2030, meaning the first £325,000 of an estate will remain tax free. This increases to £500,000 where a residence is passed on to direct descendants.

The Government are currently undertaking a Technical Consultation on the implementation of these changes as it will be the Scheme Administrator who will be responsible for paying any IHT on pensions. Westerby remain committed to ensuring that when the changes are formally implemented, we will have robust systems and controls in place to facilitate these payments during what is always a difficult time for beneficiaries.

Capital Gains Tax (CGT) & Shares

As widely predicted before the Budget there are increases to the capital gains tax (CGT) rates.

For disposals made on or after 30 October 2024 on gains over the Current Annual Exempt* rate of £3,000:

• the main rates of CGT that apply to assets will increase from 10% to 18% for basic rate taxpayers and from 20% to 24% for higher rate taxpayers**
• the rate which applies to trustees and personal representatives will increase from 20% to 24%

*The maximum amount of gains that can be made on disposal of assets reduced from £6,000 to £3,000 with effect from 06/04/2024

**Assets does not include residential property and carried interest

The above changes relate to shares held outside of a registered pension scheme. Therefore, once shares become assets of registered pension scheme, they remain free from CGT upon disposal. However, if you wanted to place shares personally held by you into your pension, the CGT on disposal to your Scheme increases to 18% or 24% depending on your tax bracket.

Qualified Recognised Overseas Pension Schemes (QROPS)

A QROPS is an overseas pension scheme that His Majesty’s Revenue & Customs (HMRC) consider eligible to accept transfers from a UK pension scheme. 

Pre Budget

Before the 2024 Budget, you were able to transfer your UK registered pension scheme funds to a QROPS without deduction of the 25% Overseas Transfer charge (OTC) if the QROPS receiving the transfer was established in Gibraltar or a country within the EEA and the pension scheme member was resident in the UK or resident in a country within the EEA. 

Transfers to QROPs outside Gibraltar or the EEA could also qualify for exemption from the OTC subject to a variety of other conditions being met.

Post Budget

With effect from 30^th October 2024, the automatic exemption from the 25% OTC no longer applies to QROPS is established in the EEA or Gibraltar bringing them into line with transfers to other jurisdictions.

The Chancellor has also confirmed that with effect from 6 April 2025 an enhancement to the regulatory requirements a QROPS needs to attain, in order to be considered a qualifying QROPS by HMRC. This includes being regulated in the country of registration and for any QROPS established in the EEA, the need for the country to hold a double taxation agreement that provides for the exchange of information, or a Tax Information Exchange Agreement.

This may reduce the number of QROPS meeting HMRC’s qualifying rules, and subsequently result in non-recognised transfers taking place, subject to unauthorised payment charges.

Summary

Westerby will continue to work hard to ensure the changes above, along with all other changes introduced in the Budget, are implemented within the business. As part of this, we will follow closely the progress of the various Consultation Papers that the Government launches and any other legal or regulatory implications these changes have.

The information provided is based on our current understanding of the relevant legislation, regulations and current and historic tax laws. These may be subject to alteration as a result of future changes.

Westerby are unable to provide financial, tax or legal advice and you should seek this as appropriate. If you do not have an adviser, you may wish to visit www.unbiased.co.uk to locate an adviser in your local area.