Pre-Budget, where are we in the process? – Q&A

There has been very little explicit speculation ahead of this Budget. The wider policy argument is that, if the Government wants people to save more, it should not remove the incentives that encourage saving. Pension tax relief can look expensive in the short term, but the long-term benefits of stronger retirement saving are significant given the changes already affecting savers, including salary sacrifice; a change this year does not look likely. There has also been discussion about using tax relief to encourage UK investment, but that still appears some way off.

A wholesale reform would take the industry a long time to implement. However, anti-forestalling measures could be introduced immediately. In 2010, the special annual allowance was used to restrict relief straight away while a wider reform was being considered. A similar restriction could therefore be announced on Budget day, although that is not expected. If higher-rate relief is valuable to a client and the contribution is otherwise appropriate, they should not assume they can safely wait until the last minute.

No. In this context, a pension lock means stability in the pension rules. It is a call for the Government not to keep changing the key pension tax rules, so people can have confidence in their long-term savings and understand how those savings are likely to be treated.

It is unlikely to be entirely simple. Detailed rules would be needed for lifetime gifts. For example, if an OEIC were gifted, would that remain an immediate CGT event, or would the recipient inherit the donor’s original base cost? There would also be questions about existing gains and whether any tapering or inflation relief should apply. Would the presence of IHT on the asset dictate the CGT treatment? Would holdover relief no longer be required?

The change would not necessarily be as complicated as replacing higher-rate pension tax relief, but it would still require careful design. In mainstream financial planning, many investors already realise gains through portfolio rebalancing, so the effect would vary according to how assets are held and managed. Nevertheless, the current uplift can appear anomalous because accrued gains disappear on death. Removing it may therefore be seen as relatively low-hanging fruit and could also prompt disposals that bring CGT receipts forward.

It is possible, but there is no clear indication that such a change is planned. The Government would also need to consider whether making gilts less attractive to investors would be sensible from a wider macroeconomic and funding perspective.

This has been rumoured before, but there has been no specific indication that it will happen this time. It is possible, but not expected. If the Government wanted to raise more inheritance tax from trusts, increasing the periodic charge rate may be a more plausible (and previously rumoured) option than extending the seven-year period to ten years.

It is unlikely to happen. Means-testing on a national scale is expensive and resource-intensive. The Government would need to invest in the administrative infrastructure required to assess entitlement, and the savings might not exceed the cost and complexity of operating the system. The State Pension is also designed to be broadly universal and is linked to an individual’s National Insurance record. If further means-testing is introduced, working-age benefits are a more likely area of focus.

Either allowance could be changed relatively easily, but neither change is expected. Reducing the annual allowance from £60,000 to £50,000 might raise some money, but it would sit awkwardly with concerns about the retirement savings gap and the need to encourage pension saving.

The money purchase annual allowance is more sensitive because it can affect people on relatively modest earnings who are phasing retirement, reducing their hours or supplementing earnings with pension withdrawals. When it was £4,000, someone on average earnings with a generous workplace pension contribution could be caught. Reducing it again could therefore discourage the very saving that policy should support.

Potentially, yes. The risk is greatest where someone in ill health uses a substantial pension fund to buy an annuity that provides a younger adult child with a continuing income, particularly if death follows soon afterwards. HMRC could view this as reducing the estate to confer a benefit on another person.

An annuity purchase within the two years before death may already need to be reported as a change to pension benefits. Arrangements entered into late in life and mainly to reduce the estate could therefore attract scrutiny. Surviving for seven years should remove the risk, but the precise transfer-of-value analysis is not fully resolved. The arrangement should have a genuine income-planning rationale, together with a sensible plan for income that is not immediately required, such as saving, investment or protection.

The personal allowance, the basic-rate band, the higher-rate threshold and the inheritance tax nil-rate bands are frozen. The Budget may address the position of people whose only income is the State Pension where it exceeds the personal allowance. The Pensions Minister, Torsten Bell, has indicated that this outcome will not be allowed to happen, although the mechanism is not yet known. The administrative burden of collecting relatively small amounts of tax, and the political optics of taxing the State Pension alone, both support the case for action.

That does not look especially likely at this stage. Freezing thresholds beyond the life of the current Parliament would use political capital without producing an immediate fiscal benefit. A future Government could revisit the issue after an election and a new manifesto.

No material changes are expected. However, the savings rate increasing to 22% from April would affect the taxation of bond funds, including an increase in the internal rate from 20% to 22% (assuming no dividends in return). Any further measures will need to be assessed once the Budget documents are published.

The Treasury is likely to consider a wide range of options. The key policy question is whether the current treatment remains aligned with the original purpose of business relief, which was to prevent family businesses having to be sold to meet an IHT bill.

There is a clear distinction between that purpose and buying a minority interest in an unquoted company primarily for IHT planning. Against that, business relief can encourage investment in smaller companies. Existing reforms, including the cap on full relief, may already be regarded as sufficient, but further change remains a possible revenue-raising option.

Yes, it is possible. The current political leadership may feel able to distance itself from unpopular policies associated with the previous Chancellor and Prime Minister while retaining the fiscal rules. Any reversal would still need to be weighed against the administrative work already undertaken and the revenue or policy benefit of changing course.

It may already have reviewed the options, because the Treasury routinely considers a wide range of possible changes. However, many ideas do not make it into the final Budget. EIS was left largely untouched when VCT relief was reduced, but there is no firm indication that this treatment will continue.

Yes, this is reasonably plausible. Increasing retail investment and improving financial education appear to be Government priorities. A UK-focused stocks and shares ISA could support that agenda, but its effectiveness would depend on more than the tax wrapper itself. There would also need to be a sufficient pipeline of attractive UK investment opportunities and a broader policy environment that encourages investment in UK equities.

A consultation has closed, and the Government’s response is awaited. The outcome could appear in the detailed Budget documents even if it is not announced in the Chancellor’s speech.

Yes, but the answer depends on the comparative tax cost on death and during lifetime. A pension fund could face IHT and then income tax in the beneficiary’s hands, producing an effective combined burden that may be much higher than the IHT exposure on an ISA. As a broad rule of thumb, it may be sensible to spend the asset with the higher tax cost on death before assets with a lower death-tax cost, while considering whether lower-tax assets can instead be gifted.

This is not a one-size-fits-all answer. The modelling is sensitive to investment growth, the client’s tax rate, the beneficiary’s tax rate and the way each wrapper is used. The underlying IHT planning principles have not changed, but the calculations are becoming more complex because advisers must consider the interaction between IHT, the client’s income tax, the beneficiary’s income tax and growth inside and outside the pension.