Tax Rises Are Back on the Table, Is Your Estate Planning Ready for the Autumn Budget?
The Prime Minister has refused to rule out further tax rises in the Autumn Budget. For families already concerned about inheritance tax, pensions, property and the rising value of their estates, the important question is not what the Government might do next, but whether their existing planning is ready for it.
A BBC report this week quotes Prime Minister Andy Burnham acknowledging that the Government faces a “challenging” financial position and refusing to rule out tax increases when the Chancellor delivers the Autumn Budget on 28 October.
The background is equally important.
Government borrowing was reportedly higher than expected in July despite strong income tax receipts. Inflation reached 2.9%, while business leaders continue to warn about the increasing cost of employing people and doing business.
At the same time, the Government has committed itself to existing fiscal rules intended to fund day-to-day spending from taxation while reducing debt as a proportion of the economy. Put those things together and one conclusion is difficult to avoid:
The pressure to raise revenue has not disappeared.
That does not mean we know which taxes will change. We do not.
And families should be very wary of anyone claiming to know precisely what will be announced before the Chancellor stands up at the despatch box.
But uncertainty itself creates a legitimate reason to review your position.
The mistake is trying to predict the Budget
Every time a Budget approaches, speculation begins.
Will inheritance tax change?
Will capital gains tax increase?
Will allowances be restricted?
Will pensions be targeted?
Will property, businesses or investments receive different treatment?
Some predictions will prove correct. Many will not. Estate planning should not become a race to restructure somebody's affairs because of a newspaper headline. The better question is much simpler:
If the tax environment became less favourable, how exposed would your family currently be?
That is something we can assess today.
Start with what you already own
For many families, their wealth has increased almost accidentally.
A house purchased decades ago may now be worth several times its original cost. There may be pensions, ISAs, savings, investments, life assurance, business interests and other assets accumulated over a lifetime.
Individually, none of these necessarily feels extraordinary. Collectively, however, they can create an estate considerably larger and more complicated than the family realises.
That is why proper legacy planning begins with the whole position rather than with a product.
What do you own? How is it owned? What happens on the first death? What happens on the second? What passes through the Will? What sits outside it? Who controls the assets if you lose capacity? Ultimately, how much of what you have built is likely to reach the people you intended to benefit?
Until those questions have been answered, debating hypothetical Budget measures is largely putting the cart before the horse.
A Will alone is not an Estate Plan
This is another area where families can easily become complacent. Having a Will is important, but a Will is fundamentally concerned with what happens when somebody dies.
Good legacy planning also considers what happens while they are alive. That can include Lasting Powers of Attorney, property ownership, lifetime trusts, existing trusts, pensions, business succession, beneficiary protection, and the eventual administration of the estate.
The documents need to work together. We regularly see families who have accumulated a collection of perfectly respectable individual arrangements which, when examined as a whole, do not actually deliver the outcome they thought they had created.
A Budget cannot fix that, planning can.
Tax should be considered — but it should not dominate every decision
Inheritance tax understandably attracts attention because the potential numbers can be significant.
But reducing tax is not the only objective of estate planning, for many families, protection and control matter just as much. They may want to protect an inheritance for children or grandchildren. They may be concerned about remarriage, divorce or financial difficulty within the wider family. They may want to ensure that a vulnerable beneficiary is properly provided for.
Business owners may need continuity and succession planning. Others simply want to make administration easier and reduce the potential for disagreement after their death.
The most effective planning therefore considers tax, control, protection and succession together. Sometimes those objectives complement each other, sometimes there are compromises. That is precisely why planning should take place before somebody feels forced into making a hurried decision.
The danger of the pre-Budget rush
If significant tax changes are eventually announced, there will inevitably be a rush of people wanting to act. That is exactly when mistakes become more likely.
Transferring property, making substantial gifts or creating trusts should never be undertaken simply because somebody is frightened that an allowance might disappear. There can be inheritance tax consequences, capital gains tax consequences, loss of control, practical ownership issues and consequences for the people receiving the assets.
Once something has genuinely been given away, changing your mind afterwards may not be straightforward.
Good planning should withstand scrutiny after the Budget as well as before it.
The iTrust121 view
The Prime Minister's comments should not cause families to panic. They should cause families to pay attention.
We have already entered a period in which governments are having to make difficult choices about revenue, spending and taxation. It would be unrealistic to assume that estate and legacy planning can simply be completed once and then ignored for the next twenty years.
Our approach at iTrust121 is therefore straightforward. Understand the family first, understand the assets, uUnderstand what the client actually wants to achieve. Identify the weaknesses in the existing arrangements. Then consider the appropriate combination of Wills, trusts, Lasting Powers of Attorney and wider legacy planning required to achieve those objectives.
Tax forms part of that discussion, but it should never be allowed to turn sensible long-term planning into short-term speculation. Nobody outside Government knows precisely what will be contained in the Autumn Budget. What families can know, however, is whether their affairs are currently organised properly and with further tax changes clearly not being ruled out, that is becoming an increasingly important question to answer.
The best time to review an estate plan is rarely the day after the rules change.
iTrust121 Insights
iTrust121 works with individuals and families to bring Wills, lifetime trusts, powers of attorney and wider legacy arrangements together as part of one coordinated planning process.
This article is intended for general information and discussion only. Individual tax, legal and financial circumstances differ and appropriate specialist advice should be obtained where required.