In a recent Tax-Efficient Investment (TEI) special edition of the IFA Talk podcast, Jon Prescott, Partner at Praetura Investments, joined us to discuss the changes to Inheritance Tax, pensions and Business Relief (BR) and what they might mean for long-term planning.
He revealed how these reforms could reshape strategies around tax-efficient investing, and what advisers need to know to stay ahead. He also outlined how BR can still play a role in a well-diversified estate plan, the necessary changes to ensure it be used effectively going forward, and why it is essential for advisers and their clients to take action sooner rather than later.
Significant post-Budget changes
The proposed changes in the 2024 Autumn Budget created a number of conversations in the adviser community, with these changes set to impact families and future generations. One of the key areas for change was in BR, although Jon was quick to remind us that BR isn’t the only option. “I think we’ve got to remember that BR is only part of what’s possible from an estate planning point of view,” he noted. “I always say, ‘all roads don’t lead to business relief’, and nor should they.”
Jon made a point of showing Rachel Reeves some praise, at least in terms of her highlighting of BR. “I think she did a good job bringing BR to the foreground,” he said. “Bearing in mind that your average BR investor probably invests less than £200,000, so for the majority of investors, this £1 million cap isn’t going to really impact them.”
The biggest change, according to Jon, came in the pensions arena. Jon highlighted his background in pensions, praising them but noting that their usage has changed over the last decade. “We ought to remember that pensions are there to provide retirement income,” Jon said. “Over the last 10 years or so, pensions have been used as an estate planning vehicle, building up wealth and then passing that on to the next generation.”
Jon also showed sympathy with pension administrators, explaining that managing pensions is very complicated, but noting that the change will have a material impact on thousands of families across the UK. “Going forward, clients will need to look at estate planning sooner,” he advised. “It isn’t something that you can solve very quickly. Also, there may need to be an acceptance that you cannot eliminate inheritance tax completely.”
Pensions and BR in the 2025 Budget
Following the changes in 2024, Jon revealed that he hopes pensions and BR will be left alone in the upcoming Budget. “The proposed changes go far enough for the time being,” he stated. “The investors need a level of comfort that there aren’t going to be more changes, because it becomes difficult to plan.”
Jon hopes that the next Budget won’t produce any additional changes beyond what has already been proposed, although he said he would like to see some suggestions around how estates will be calculated, particularly where pensions are involved. “I think it’s unreasonable to expect the pension administrator to go through all those lengthy processes to ensure the inheritance tax is paid,” Jon said. “I don’t see pensions falling into the IHT arena. I could be wrong, but I don’t see that changing.”
Using BR effectively in a diversified tax-efficient estate plan
With BR set to continue with tighter restrctions, Jon was quick to show his backing. “I think there are some interesting planning strategies, but I think as a general rule, BR hasn’t changed,” he noted. “We now have a greater awareness of what it is and why it’s used.”
He also revealed that the number of inquiries they’ve received about BR has grown significantly since the previous Budget. “Whether it’s right or wrong, there’s been quite a lot of emphasis on tax-free cash,” he revealed. “Considering what is happening in terms of the proposals around pensions, there is now a greater focus on what happens to that tax-free cash.”
While inquiries have increased, very little has changed other than the limits. However, Jon reminded us that, while BR can still play an important role, it is just one of many strategies. He showed the same sentiment to AIM, which he believes still has a place as part of a diversified portfolio.
Advisers and clients must act now
Jon stated that Praetura have always been advocates of not leaving it to the last minute. “BR has focused on this two-year rule, partly because of the way the managers have talked about it,” he added, “If you do that, you get last-minute planning. We feel BR isn’t a last place to go. If you’re short on time, there’s a longevity risk.”
Praetura believe that BR should be introduced much sooner, with Jon referring to an example where a married couple could receive their £1 million allowance each if the investment is split. Along with that, pensions also have an impact in terms of growing the client’s estate value. “There are lots of things you can do, but there are some things you can do today to mitigate the impact of those reduced limits,” Jon concluded.