6 months on from the October Budget 2024 – Key Financial Planning Considerations

As we approach six months since Labour’s budget in October, the financial landscape continues to evolve. The key tax changes—initially proposed by the Conservative government and now implemented by Labour—have already had a significant impact. In particular, the radical adjustments to inheritance tax (IHT) have led to a wave of high-net-worth individuals leaving the UK in 2024.

While some aspects of the new tax regime remain unclear, this blog summarises the key developments.

Pensions and IHT: Preparing for 2027

From April 2027, unused pension funds will become subject to inheritance tax (IHT) on death, making pension planning more critical than ever.

• Cashflow modelling will play a vital role in determining the most tax-efficient approach to pension withdrawals.
• Pension freedoms offer an alternative for individuals over 55, allowing them to access and reinvest their pension funds in a tax-efficient manner within their country of residence.
• Beneficiary nominations should be reviewed to ensure optimal use of available exemptions, such as the spousal exemption, which remains a key tool for mitigating IHT exposure.

QROPS: A Strategic Consideration for Non-UK Residents

The tightening of the Overseas Transfer Charge (OTC) has limited the attractiveness of Qualifying Recognised Overseas Pension Schemes (QROPS) for new transfers. However, existing QROPS holders should carefully consider their options before transferring back to a UK pension scheme.

• Non-UK Long-Term Residents (LTRs) with QROPS may hold an advantage over those with UK SIPPs, as QROPS are considered non-UK assets and therefore expected to remain outside of their estate for IHT purposes.
• Asset selection is key—if underlying QROPS investments are UK situs assets, they could still fall under UK IHT rules.
• Clients residing in jurisdictions with QROPS, such as Australia, New Zealand, Malta, Gibraltar, the Isle of Man, and Ireland, can transfer pensions within their Overseas Transfer Allowance without triggering the OTC, keeping their pensions outside UK IHT.
• Some clients may find it beneficial to pay the OTC to transfer their pension overseas if they are long-term non-residents.

QNUPS: Are They Still Viable?

With the removal of IHT advantages, QNUPS (Qualifying Non-UK Pension Schemes) are becoming a less attractive option for supplementary retirement planning. However, there remains uncertainty about how HMRC will collect IHT from QNUPS, and industry feedback has been overwhelmingly negative.

Despite this, the changes will not take effect until April 2027, meaning there is no need for immediate action by existing QNUPS members. Here’s what to consider:

• Non-UK LTRs with a QNUPS may not be impacted by the IHT changes.
• UK LTRs with QNUPS may want to consider decumulation strategies.
• 30% Pension Commencement Lump Sum (PCLS) withdrawals are allowed, but the remaining balance is generally limited by Government Actuary’s Department (GAD) rules.
• Some QNUPS offer International Annuity solutions, which are expected to remain IHT-exempt while still providing death benefits.
• QNUPS may still offer Capital Gains Tax (CGT) advantages, particularly in EU jurisdictions where trusts are not recognised.
• Alternative structures, such as Flexible International Pension Plans and Offshore Bonds, should be considered as potential replacements.

Trust Planning: Reviewing Excluded Property Trusts

It’s prudent for those who hold trusts to conduct a thorough review to assess the impact of the new rules, particularly those using Excluded Property Trusts (EPTs). The transition to a residence-based tax system means that previous strategies relying on domicile status may no longer be effective.

Long-Term Residency (LTR) and IHT Exposure

The Finance Bill is progressing through Parliament, and we now have a clearer picture of how UK inheritance tax (IHT) is transitioning from a domicile-based system to a residence-based system.

• From 6 April 2025, a new Section 6A will be added to the Inheritance Tax Act 1984, defining who qualifies as a Long-Term UK Resident (LTR).
• It will be imperative for expats to determine their LTR status, which may require analysing up to 30 years of residence history.
• While domicile status will still be relevant for legal matters such as wills and estate tax treaties, it will no longer be the primary factor for IHT liability.

Conclusion

The October Budget 2024 introduced sweeping tax reforms that are reshaping estate and retirement planning for UK residents and expatriates. While some aspects of the new tax system remain unclear, It’s important to consider these changes and start planning, particularly in relation to pensions, QROPS, QNUPS, trusts, and inheritance tax.