Autumn 2024 Budget: An Altered Landscape for Investment Bonds
The Autumn 2024 budget introduced several significant changes that have impacted the role of investment bonds in financial planning. These changes affect all three stages of the wealth management journey: accumulation, decumulation, and wealth transfer. Let's delve into the budget changes that directly or indirectly influence the role of investment bonds in financial planning.
Overview of Budget Announcements
The budget backdrop included increased borrowing, more debt, higher spending and investing, and elevated taxation, all aimed at fostering economic growth. The main taxation headlines for financial planners were as follows:
1. Increase in Capital Gains Tax (CGT) Rates:
- The 10% rate for basic rate taxpayers increased to 18%.
- The 20% rate for higher and additional rate taxpayers increased to 24%.
- These changes took effect immediately from October 30, 2024.
2. Changes in Business and Agricultural Property Relief:
- 100% relief limited to £1,000,000 from April 6, 2026.
- 50% relief available on any excess.
- 50% relief for qualifying quoted but unlisted shares from April 6, 2026.
3. Frozen Nil Rate Band:
- The nil rate band and the residence nil rate band remain frozen until April 6, 2030.
4. Unused Pension Funds Subject to Inheritance Tax (IHT):
- Most unused pension funds at the death of the member will be subject to IHT from April 6, 2027.
5. Income Tax Thresholds Remain Frozen:
- Income tax thresholds, allowances, and exemptions remain frozen until April 6, 2028.
6. No Change to CGT Exemption:
- The CGT annual exemption remains at £3,000.
- The dividend allowance remains fixed at £500.
- Dividends above the allowance are taxed at 8.75% (basic rate), 33.75% (higher rate), and 39.35% (additional rate).
7. No Change to ISA Allowance:
- The maximum annual ISA contribution remains frozen at £20,000.
Impact on Investment Bonds
Many of the changes announced in the 2024 Budget, along with previous changes, have a direct or indirect impact on the attractiveness and relevance of investment bonds in financial planning strategy. Here is a more detailed outline of these impacts:
Capital Gains Tax Driving Use of Bonds
The most obvious factor driving the changing role of investment bonds in financial planning is the increase in capital gains tax rates. Effective from budget day, October 30, 2024, the new rates represent an 80% increase for basic rate taxpayers and a 20% increase for higher and additional rate taxpayers.
Additionally, the reduced (and now frozen) level of the annual exemption from capital gains tax at £3,000 and the continuing low level of the dividend allowance at £500 per annum are significant. These realities are resulting in:
- More taxpayers.
- More higher rate taxpayers.
- More additional rate taxpayers.
- More individuals paying capital gains tax.
With these realities comes the need for more individuals, especially investors, to make tax declarations and complete tax returns. This situation enhances the relative attractiveness of investment bonds as a tax deferment and tax management tool, particularly once the capacity to invest in pensions and ISAs has been exhausted. While the Lifetime Allowance has been substantially removed and the Annual Allowance increased, the freeze on the ISA contribution limit of £20,000 continues.
Estate Planning Driving Use of Bonds
Another key factor driving the changing role of investment bonds is the changes in estate planning:
- Most pension funds will be treated as part of the estate of the member on death from April 6, 2027.
- Business relief and agricultural property relief limitations take effect from April 6, 2026.
- The freeze on the nil rate band and residence nil rate band for inheritance tax continues until April 2030.
These changes could lead to an increased demand for estate planning solutions, especially for those with available liquidity. This demand may arise from the withdrawal of tax-free cash post age 75 from pension schemes, as inheritance tax (IHT) freedom disappears, and a desire to retain control over and access to those funds. For these individuals, investment bond and trust combinations could prove extremely attractive.
In conclusion, the Autumn 2024 budget has significantly impacted the role of investment bonds in financial planning. The changes in capital gains tax rates, estate planning regulations, and the freezing of various tax thresholds and allowances have made investment bonds a more attractive option for tax deferment, tax management, and estate planning. Financial planners will need to consider these factors when advising clients on their investment strategies.