September 2024: The Budget
The budget
On October 30th, the Chancellor, Rachel Reeves, plans to deliver a UK budget showing "real ambition". She’s also on record promoting the idea of "asking those with broader shoulders to pay a bit more".
As most of our clients are dental practice owners with either a high income, net worth or both, it’s likely that many will fit into the category of the "broader shoulders" and it's no surprise that we’ve been getting a number of emails and calls to the office about this over the last few weeks.
Our advice continues to be based on existing rules as we can’t possibly know exactly what changes will be announced. Whilst the Government have confirmed their pledge not to increase income tax, VAT or National Insurance contributions, the current budget deficit means changes to Capital Gains Tax (CGT) and Inheritance Tax (IHT) are likely. They’ve already announced the VAT on school fees – a 20% increase effective January 1st, 2025.
I have listed some of the other possible changes that could affect many of our clients:
Capital Gains Tax
An increase in this tax looks like an obvious target and is widely predicted to be increased and aligned to income tax rates
The key question is whether any increases are implemented immediately (which has happened before), leading some to consider the sale of an asset before October 30th – not so easy if it’s a property or a business you need to sell
One point to consider if an increase would affect you is that the Chancellor could raise more money in the short term by deferring the change to April 6th, 2025, potentially giving you a few extra months to line up the sale
Business Asset Disposal Relief – previously known as Entrepreneurs Relief
Business owners currently benefit from paying only 10% capital gains tax on the first £1m of gain when they sell their business
Given Reeves's statements at the recent Labour conference, business leaders are confident that the budget will be pro-small business and this is not widely predicted to be a major target
Pensions
Changes to pensions, such as reducing or abolishing tax relief, get raised before every budget
There are rumours of change to the annual allowance (how much you can invest each year), changes to the tax-free cash available at retirement and the inheritance tax status
Any changes such as the reduction in tax-free cash, or reintroducing the LTA, would almost certainly have transitional protections, meaning this is unlikely to raise any significant additional cash for the Chancellor in the short-term. I agree with Sir Steve Webb (previously Minister of State for Pensions) who said: "The risk for the Treasury is that, by the time they had protected those who already had substantial pension pots, they might generate relatively little short-term revenue from the policy, but face all the political flak from the outset."
The pension system is also incredibly complex and, with many voters in the NHS pension scheme threatening early retirement if changes are too harsh, they are typically left untouched
Some of the pension providers we work with (that have close links to government) have suggested that no major review of pensions or tax relief is underway – given the strategic importance of pensions to the UK economy. However…
For some of our clients that can afford to maximise their pensions this year, we’ve made the decision to do this before the end of October rather than waiting until the end of the tax year – April 5th, 2025
IHT
There’s certainly speculation that the nil rate bands and even the 40% rate of tax could be changed
There are also specific reliefs available to farmers, owners of family businesses and investors in the alternative investment market AIM
The Chancellor will have to carefully consider the likely revenue raised with any changes versus any controversies that could have a significant backlash, particularly as many of the Business Relief schemes provide investment in the UK into renewable energy and infrastructure
The key for us as financial planners is that there are multiple ways to help reduce an inheritance tax liability and, if there are any changes, we’ll be in touch with any clients likely to be affected
Regret Minimisation as a Decision-Making Tool
In line with our philosophy, we are against recommending any significant changes to your financial position due to speculation of potential rules changes.
One of the reasons for this is that a knee-jerk reaction is not always appropriate when viewed over the longer term. Financial planning has a feedback loop longer than most other disciplines. The consequences of our decisions can take decades before they become fully evident to us. A possible downside to this long feedback loop is that this period can be filled with uncertainty, doubt, and the fear of making mistakes.
Having seen many people arrive at retirement with less than they need, this reality is especially clear to us. Unfortunately, human nature doesn’t help the cause. Our instincts, perfected over centuries of survival, lead us to make suboptimal decisions that don’t serve our interests in the modern world of money.
The result? Regret – not for us but for our future selves who must deal with the consequences.
A New Lens: Regret Minimisation
Regret is an unavoidable emotion in life and it teaches us lessons that serve us well in the future. It is especially useful for activities where the feedback loop between decision and consequence is short.
However, when this feedback period becomes decades-long, as it often does with financial planning, it is wise to consider how to minimise future feelings of regret ahead of time rather than wait to learn the lessons the hard way.
This decision-making tool is one that the well-known founder of Amazon, Jeff Bezos, has often used. For example, he used it to decide to leave his high-paying job on Wall Street and start Amazon in the early days of the internet. He sought to minimise the potential regrets he might have had later in life by seizing a unique opportunity, even though it meant taking on significant risks and uncertainties at the time.
While it may sound obvious that we should try to minimise future regret, it requires intentional thinking to view decisions through this framework. If not done intentionally, we will likely fall back on our default mode of prioritising current needs over future ones.
The Mindset as a Financial Planning Tool
Many financial decisions become easier to make when viewed through this framework as it forces us to place ourselves in the shoes of our future selves, allowing us to consider the complex trade-offs that any financial decision involves:
Save more for retirement, or improve your daily life now?
Work hard now so that you can travel in retirement, or spend more time with the children while they are still living at home?
Stay as an associate, or take a risk and set up the practice you are passionate about?
Buy a new car, or send the children to private school (and pay an extra 20% VAT!)?
We should always be on the lookout for mindsets and methods to become more familiar with our future identity, and considering what we will least regret is a powerful exercise. While it gives no guarantee that our decisions will turn out well, it forces us to ask more relevant questions about the trade-offs involved.
Life is Not a Dress Rehearsal
Choosing the wrong meal for lunch may lead to frustration, but there will be many more opportunities to correct the decision. It’s in the more significant moments that we want to give ourselves the best chance of making smart and well-informed decisions. Unfortunately, these decisions are the ones that come around infrequently and which most of us make only a few times in our lives.
Realising that any major regrets we end up with are ones we’ll need to make peace with, we want all investors to have the best tools available when the big decisions present themselves. Regret minimisation is a thinking tool every investor should become familiar with. As financial planners, we provide the technical insight needed to help make the right choice in many of the decisions you face, and we hope that they serve both your current circumstances and your future self. Life is not a dress rehearsal, and when it comes to regrets, less is more.
Making an impact
One of our planners had a meeting this month where they illustrated to a couple in their 60s that, in the event of their premature death, their two children (currently in their early 20s) would each inherit over £2.5m (net of IHT). It made far more sense, in the unlikely but possible event they both died, to allocate any inheritance to a trust, appoint appropriate trustees and draft a Letters of Wishes. This makes sure their children would only inherit the right amount at the right time.
Of course, subject to the Chancellor's budget next month, their children might not be inheriting quite so much!
The Stock Markets (updated August 31st, 2024)
The key benchmark you should care about is achieving all of your financial and life goals and not running out of money.
That's all for this month's newsletter. Summer's flown by and I can't believe I'm saying this, but I'll catch you in October!