Tax charge ahead, is it time to change course?

It’s been a tough few months for the tax landscape. For many clients, 2025 will see a change of direction for their financial planning, as we adjust following the recent budget, which delivered some significant changes to the way many assets are taxed.

Subsequently, even more consideration will need to be given as to where and when clients take their income, coupled with how to manage and reduce larger inheritance tax liabilities. Positively our main platform (abrdn) provides us with a range of tax wrappers offering flexibility and easy access, enabling our teams to ensure clients’ plans are adjusted accordingly to maximise tax efficiency as legislation changes.

As always, each client’s position is unique, and there isn’t one solution that fits all. Some clients will spend through their pension savings in retirement, making the recent change to introduce an inheritance tax charge on your pension death benefits less relevant.

For those who won’t, it’s a very different story though. For those that are not eroding their pension, and hoping to pass it down to future generations, these clients will need help to mitigate the increased IHT given that their pension death benefits are included within the estate from April 2027. In the last 10 years, preserving pension assets and earmarking them as the asset to use, only if other assets were exhausted, was the right way to plan. However, this will now revert, and as a minimum from 2027, perhaps sooner, we may be recommending things such as clients drawing from their pension up to their basic income tax band. If this is spent or gifted in their lifetime, tax will be payable at 20% rather than leaving pension funds to accrue to be taxed at 40% down the line.

So, the main impact will likely to be felt by individuals who, up until now, are likely to have pension assets left in later life. This applies to a significant proportion of our client base. However, just because it’s a harsher landscape doesn’t mean there aren’t good options. In fairness, pensions haven’t gone from being brilliant planning vehicles to poor, we just need to adjust how we use them in relation to an individual’s position and goals, and how we can integrate other investment tax wrappers.

Another way to look at it is that from 2027 it is likely that all the main tax wrappers (such as ISA’s, Pensions, General Investment Accounts, bank accounts etc) will be on an equal footing for IHT and it is other taxes, such as income tax and capital gains tax, which now sets them apart.

That said, although pensions will be the new kid on the IHT block so to speak, it does not mean that they should initially be targeted as the asset to be gifted. The growth in pension funds is still sheltered from income and gains from tax whereas other tax wrappers, apart from ISAs, cannot. This advantage should not be dismissed in a scramble to reduce the potential IHT bill.

Overall, there are so many options to consider, and as always, our advisers are busy reviewing client plans to formulate the best forward strategy. Clarity is always key, and this job is not made any easier by the fact that legislation is still only drafted and the technical consultation of how it will operate isn’t yet complete.

What will our advice teams be doing while we wait?

At DB Wood our teams plan from a holistic viewpoint. When choosing which tax wrappers your income should come from, we consider the effect of retaining and growing assets that are not being used for income. What will the tax implications be on capital gains, income distributions, and on death? This is best visualised in a cashflow forecast, where our advice teams can spot tax build up and plan to mitigate accordingly. So in 2025 expect your planning team to continue to cover off the most effective ways for you to grow your wealth and take your income. Taking income from the wrong area or not having a suitable range of tax wrappers can now seriously damage your wealth, so changes might be required to ensure you stay in tip top shape.

Finally, it is worth noting, that although the inclusion of pensions in the estate for IHT will be unwelcome, it should be remembered that the opportunity to use pensions as a tax efficient wealth transfer vehicle has only really been with us since pension freedoms in 2015. Before that time we managed to create fantastic client planning outcomes, and we are just as confident we will do the same over the years to come.