That ‘spending audit’ will set the scene for an Autumn Budget that is increasingly expected to feature tax rises in some form or other, with one independent analyst warning that taxes could rise by anything from £10bn to £25bn, in addition to the £8.6bn of revenue raising measures announced in the Labour manifesto.

Laura Hayward, tax partner at professional services and wealth management firm Evelyn Partners, said that the capital gains tax treatment of assets on death could be lined up for reform:

‘While the Labour manifesto stated there would be no increase to the basic, higher, or additional rates of income tax or to national insurance, it made no mention of capital gains tax. Labour has stuck to a line that there are “no plans” to increase CGT, but stopped short of ruling that out.

‘However, several Labour MPs have voiced their views that the rates of CGT should be raised, with some backing a raise to bring it in line with the rates of income tax. With the new Government suggesting public finances are more stretched than publicly available data shows, CGT could be a target. One option is to change the tax treatment of assets on death.

‘Currently, although the value of an individual’s estate – minus any reliefs – may be subject to IHT, it is not liable for CGT on the accrued gains, and the beneficiaries of the estate are deemed to acquire the asset at market value. This means that when the asset is later sold, only gains from the value at date of death may be taxable.

‘Various reports over the years have made recommendations on reforming this CGT rule on death, either charging CGT on the gains at point of death, or making the beneficiary liable for all of the capital gains on assets inherited, back to the base cost when they were purchased.[2]

‘The Budget will be closely watched for any changes made to the CGT rules on death. A forceful option open to the Chancellor would be to apply CGT to the assets in the estate, treating them as disposed of on death, in which case it is likely that the estate would have to pay the CGT bill. The beneficiaries would be affected indirectly by the reduced value of the estate, as is the case for IHT. With this option the estate could struggle to fund CGT charges without making actual sales.

‘A more gradual and possibly more likely option would be for the assets to be received by the beneficiaries with the base cost remaining as their purchase cost, rather than the value on inheritance. In this case the beneficiary would have to pay CGT when they chose to sell the asset. This option would give more flexibility in timing the CGT charge, and would mean that the beneficiary would have the sale proceeds to pay the CGT with.

‘Either would be complicated to administer, particularly when working out the purchase costs for the assets belonging to the deceased. Charging CGT on top of IHT could give rise to very substantial tax bills, if there was no offset between the two.

‘To illustrate the impact of the changes, and assuming no exemptions are available, take a shareholding purchased for £20,000 but now worth £50,000. Currently, if the owner dies then if the estate sold them for that value no CGT would arise. If they were passed to a beneficiary, then on any sale the base cost would be £50,000, and the gain or loss would be calculated from that.

‘If the CGT uplift was removed, then under the first option discussed above the estate would have to pay CGT on a £30,000 gain. They could then be passed on to the beneficiary with the new base cost of £50,000, as under the current rules. If the second option, where the estate does not automatically pay CGT, was taken, then the estate would only pay CGT if it sold the shares. If they were passed to a beneficiary, then that beneficiary’s base cost on which to calculate a gain or loss on eventual sale would be the original cost of £20,000.

‘The 40% rate of IHT would also be due on these shares in the estate if they did not fall within the nil rate band.

‘These changes would have most impact on families who currently fall within the IHT net, where estates are large enough to have substantial assets other than a family home and cash. Presumably the CGT exemption for family homes would apply to the sale of that property by an estate, or an uplifted base cost would be passed on to the inheritor, but neither of these are certain.

‘A Labour Government could also consider changes to CGT rates. CGT is not a big revenue raiser, with the OBR estimating that total CGT receipts would be £15.2 billion in 2024/25, which represents 1.3% of all receipts. However, a CGT rate rise could certainly form part of a package of measures to increase tax revenue, and it is quite possible that Labour could look to increase rates of CGT at the next Budget.’

Among other expert industry views views, accountants and business advisers James Cowper Kreston said the UK Government should, at least for the time being, ignore calls to adopt a flat 30% rate of pension relief.

It will, the firm says, be horrendously complicated to implement and is likely to hit key public sector employees, such as doctors and teachers.

Stephen Barratt, a partner in the Private Client Services team at James Cowper Kreston said: “The proposal is deceptively simple. It is easy to understand why a flat rate of 30% appears attractive as it might encourage lower earners to save more. But it would penalise those earning over £50,270 because their relief would be reduced from 40%/45% to 30%.

“The law of unintended consequences could see such a move penalise public sector workers, particularly doctors and increasingly teachers, with the Institute of Fiscal Studies suggesting one in four teachers set to be higher rate tax payers by 2027. Politically, that would be very difficult for the Labour government to justify.

“Critically, these proposals would be enormously complicated to implement, especially where pension contributions are made by employers and perhaps even more so in the case of members of final salary schemes. e might find that 20% taxpayers miss out on the additional 10%.

“The Labour government has set out an ambitious programme of reform. Whilst tax on pensions might be something to consider, it is essential that the consequences of any change are properly thought through.”

Investec Wealth & Investment commissioned independent research agency Viewsbank to interview 535 UK consumers with stock market related investments between 30th June and 3rd July 2023

The study amongst 535 UK consumers with stock market related investments revealed that on retirement of their adviser, three in five (61%) will retain the same firm and use another professional within the company; 31% said that they will find another adviser for themselves and 8% said they will stop using a financial adviser altogether.

The concern over losing their adviser to retirement may be heightened by the fact that 21% of people believe their financial planner will retire within the next two years and 41% think this will happen within the next five years. Their fears are not unfounded and are backed up by other Investec Wealth & Investment research, which surveyed 100 financial advisers and planners about their retirement plans in January 2024, with almost half (49%) stating that they had plans to retire within the next five years. Around two in five (35%) said they planned to retire by the time they turn 50.

The research by Investec Wealth & Investment (UK), which provides products and services to help advisers build a competitive advantage and protect and grow their clients’ wealth, reveals that men are much more pessimistic about losing their financial adviser than women, with more than half (52%) of men saying they were either “very concerned” or “quite concerned” about the prospect of their adviser retiring, compared to 25% of women.

Nick Vaill, senior investment director at Investec Wealth & Investment (UK), said: “It is entirely understandable that clients often find themselves worrying about what will happen to their financial investments and affairs when their adviser retires. They are concerned about losing the personal attention and expertise they have come to rely on and are worried that any change in personnel could disrupt the continuity of their investment strategies that have been put in place.

“However, retirement is part of the natural course of life and most financial advisory organisations will have succession plans in place to ensure the smooth transition of a client’s financial assets to another qualified professional. We have seen the importance of advisers implementing a centralised investment proposition and working in conjunction with a Discretionary Fund Manager to better facilitate the sale of a business or hand over to a new adviser. Advisory models do come with additional administrate burdens and costs which may put off potential acquirers.”

Wesleyan’s survey shows that more than a quarter (26%) of over 55s are ‘unretiring’ – doing, or planning to do, some form of paid work while in retirement.

However, it highlights that these individuals are potentially overlooking the tax implications of this decision, and could be falling into a ‘tax trap’.

The survey of 2,000 UK adults aged 55 and over, was conducted by OnePoll on behalf of Wesleyan Financial Services in May 2024.

Concerningly, three fifths (60%) of over 55s who are or plan to work in retirement say they have no plans to seek retirement advice.

Linda Wallace, managing director of Wesleyan Financial Services said: “The traditional goals of ‘retire and stop’ are changing. ‘Unretiring’ is no longer a trend but a permanent feature of society and it can offer hugely positive opportunities for people later in life. But before making any decisions about whether to unretire, bear in mind that working in retirement also comes with tax implications.

“If you are already taking money out of your retirement savings through an annuity or drawdown or are receiving the state pension, any extra income will boost your earnings and potentially add to your tax bill if the amount is above the personal tax threshold, which is currently £12,570. Combining salary with pension income could also push you into a higher tax bracket, increasing your tax liability. Note, tax treatment depends on everyone’s individual circumstances and may be subject to change in the future.

“Also, if you want to continue to boost your pension contributions by returning to work, you may be limited in how much you can pay in, tax efficiently. Pensions and investments are complicated areas to understand and going back to work could make matters even more complex. To avoid falling foul make sure you’re well-informed and seek advice.”

The survey found that the reasons behind ‘unretiring’ can have nothing to do with money.

Although more than a fifth (22%) of those who had retired and who were working, or planned to work, said they were doing so to generate additional income for luxuries like travel and home renovations, a similar proportion (19%) said it was to keep their brain active, while just over one in ten (13%) said they wanted to give themselves a better sense of purpose.

Meanwhile, more than a third (36%) of those who were yet to retire, but who wanted to keep working said it was because they thought they’d miss social interaction.

Wesleyan’s research also highlighted that working in retirement doesn’t always mean returning to a previous career or work arrangement – 43% of ‘unretiring’ over 55s who were already retired said they had, or planned to, change their profession.

Ten tips to avoid the ‘tax trap’

1. Seek Professional Advice : Consulting a financial advisor can help you structure your finances in the most tax-efficient manner. They can provide personalised advice based on your specific circumstances.

2. Understand Your Tax-Free Allowance: Every individual in the UK has a personal allowance, which is the amount of income you can earn before you start paying income tax. For the 2023/24 tax year, this allowance is £12,570. If your total income (including pensions and new earnings) exceeds this threshold, you’ll be liable for income tax.

3. Review Pension Withdrawals: If you’ve accessed your pension using flexible drawdown, be aware of the Money Purchase Annual Allowance (MPAA). This limits the amount you can contribute to a defined contribution pension scheme to £10,000 per year without incurring a tax charge. Exceeding this limit can lead to unexpected tax bills.

4. Plan Your Income Streams: Consider how your different sources of income (state pension, private pensions, new salary) interact. Keeping your total income within the basic rate tax band can help minimize the tax burden. The basic rate for the 2023/24 tax year is 20% on income between £12,571 and £50,270.

5. Utilise Spousal Transfers: If your spouse or partner has unused personal allowance, transferring a portion of your income to them can help reduce the overall tax burden. This can be done through the Marriage Allowance or, for larger amounts, by transferring savings and investments.

6. Maximise Tax Reliefs and Allowances: Make use of available tax reliefs and allowances. For instance, investing in an ISA (Individual Savings Account) can provide tax-free income and gains. The annual ISA allowance for the 2023/24 tax year is £20,000.

7. Consider National Insurance Contributions: If you are below the State Pension age and return to work, you may need to start paying National Insurance contributions again. Check your contributions record and the impact on your future entitlements.

8. Defer your State Benefits: You don’t have to take your state pension when you hit state pension age, currently age 66. If you defer it, you’ll get paid a higher amount when you do decide to claim – up to just under 5.8% a year more. But you’ll receive it for a shorter time.

9. Timing of Income: If possible, spread out your income to avoid being pushed into a higher tax bracket in a single tax year. For example, consider deferring pension withdrawals or taking advantage of salary sacrifice schemes.

10. Keep Records: Maintain detailed records of all your income sources, pension withdrawals, and tax relief claims. This will make it easier to complete your self-assessment tax return and ensure you don’t miss any important tax breaks.

The study among 100 financial advisers and financial planners across the UK, found that over a third (37%) are considering retiring within the next four years and 22% plan to do so in the next three years. On average, the research found they will retire when they turn 52 years old although as many as one third (35%) intend to retire before they turn 50. Just 6% will wait until they are 60 or older before they retire.

The research by Investec Wealth & Investment (UK), which provides products and services to help advisers build a competitive advantage and protect and grow their clients’ wealth, reveals a sizeable proportion of the assets managed by IFAs and financial planners intending to retire soon could move to different wealth management firms when the advisers stop work.

On average, the soon-to-be-retired advisers and planners surveyed each help manage around £34 million worth of assets, with more than one in ten (12%) managing between £50 million and £100 million. However, 51% of IFAs and financial planners interviewed estimate their firm will only keep up to 50% of the clients’ assets they currently personally manage, and just under half (48%) say their firm will keep between 50% and 75%. Only around 1% say their firm plans to keep between 75% and 100%.

Investec Wealth & Investment (UK)’s study found that there are a number of different reasons as to why IFAs and financial planners are intending to retire. More than a third (38%) cite personal reasons and a third (37%) say the company they work for has been bought by another company or merged and they don’t like their new working conditions. There are also concerns about the state of the industry, with a third (34%) saying the job has become too stressful.

Around the same number (32%) say there is too much regulation and red tape now, and a quarter (29%) cite health reasons. More than one in ten (12%) feel there is too much ‘noise’ – with constant distractions such as social media alerts on the stock markets, making it a very difficult environment to operate in.

Simon Taylor, head of strategic partnerships at Investec Wealth & Investment (UK), said: “Our research points to a number of concerning trends, with half IFAs and financial planners interviewed planning on retiring in the next five years and their employers not retaining all of their clients’ assets.

“As the sector is set to lose so many of its most experienced workforce, more must be done to make it an attractive career for new talent – both to the younger generation just starting out and those looking to switch from other professions.

“We have been working with The Lang Cat on research which looks at the practicality of running models for advisers in the light of the current regulatory environment. The ways in which adviser firms operate and the tools and services that are available to IFAs and financial planners have a huge impact on their day-to-day workload, but also on the quality, value and level of service they can offer their clients.

“Having the right products and services at their fingertips means that IFAs and financial planners can not only build stronger client relationships but also win new clients – as well as reducing the administrative burden and allowing them to focus on the aspects of the profession that really matter.”

One of the areas most affected is that of overseas transfers. This includes transfers both from and to the UK.

For transfers to the UK, members who previously transferred to a QROPS and are now transferring it to a UK pension scheme are in danger of losing out, because the rules now require pension schemes to reduce the new Lump Sum and Death Benefit Allowance and Lump Sum Allowance by 25% of any lifetime allowance usage before 6 April 2024. The old overseas transfer BCE8 test used up lifetime allowance and if members haven’t crystallised benefits in the UK, they will incur a 25% deduction from the new allowances even though they haven’t taken a tax-free cash sum within the UK income tax regime.

The answer for members in this situation is to request one of the new Transitional Tax-Free Allowance Certificates (TTFAC) on transferring back to the UK, which will ensure their allowances are not reduced. They need to have that certificate however before they start taking non-taxable benefits in the UK.

The situation is more serious for individuals who wish to transfer overseas and have already crystallised benefits in the UK. This is because the calculation for the new Overseas Transfer Allowance (OTA) requires pension providers to reduce the OTA by the value of any lifetime allowance usage before 6 April 2024 and to reduce by 100% of the usage, rather than the 25% which applies in most other circumstances.

So, taking the hypothetical case of a bloke called Mike, imagine he had crystallised 75% of his pension fund in 2015, when the lifetime allowance was £1,250,000, designating to drawdown and taking PCLS.  If he now transfers his pension pot to a QROPS, the overseas transfer allowance will be reduced by 75% and the value of his pension measured against that smaller figure, rather than the full £1,073,100 allowance.

He is almost certainly going to exceed the OTA and incur a 25% tax-charge on the excess.

This double counting is a result of some clumsiness in the wording of the new legislation. Clearly what should happen is that the overseas transfer allowance is NOT reduced by previous lifetime allowance usage, or if it is, reduced by only 25% to be consistent with HMRC’s approach on their other new benefit calculations.

HMRC issued a last-minute newsletter on 5 April 2024 advising that members considering a transfer to a QROPS might wish to postpone it until the rules have been corrected. All well and good, but here we are in mid-June now, with no indication when HMRC will carry out the correction, which is really not helpful to ex-pats to want to move their pensions out to a QROPS and in some cases have time sensitive deadlines, due to the way in which benefits can be taxed in their new host country.

The UK election is likely to put the brakes on any legislative amends, so this is one area that advisers need to be on their guard for.  If your client is seeking to transfer overseas and has a large pension fund made up of crystallised benefits, then be very careful. It might be worth postponing the transfer for the time being, but at the very least careful consideration needs to be made of the impact of the charge, against any possible tax implications which may occur in the new scheme, if the transfer does not take place before a particular deadline.