What the October 2024 Budget Means For Family Law & Inheritance Tax (IHT) Planning

The October 2024 Budget introduced several significant measures that could impact family law and inheritance tax (IHT) planning in the UK. Here’s what you need to know and the main areas affected:

1. Inheritance Tax (IHT) Changes

The budget proposed changes that will broaden the scope of IHT, including the inclusion of pension funds as part of a deceased’s estate. These changes will be effective from April 2027.

Impacts on Family Law and IHT Planning:

• Increased IHT Liability: More families may face higher IHT bills as assets, such as pensions, are brought into the chargeable estate. This could affect how individuals plan their estates, particularly in terms of how wealth is transferred to heirs. It will be crucial for individuals to review their pension death benefit nominations to ensure they align with their broader estate planning objectives. Depending on their circumstances, they may consider withdrawing pension savings and transferring them into other IHT-efficient assets while they are alive, rather than relying on pension death benefits to pass on wealth tax-efficiently.
• Financial Settlements in Divorce: In divorce cases, the increased potential for IHT may influence negotiations around the division of assets. For example, if a significant portion of the estate will be subject to IHT, parties may need to consider this when valuing assets during settlement discussions.
• Trust and Estate Planning: Individuals may need to reassess their estate planning strategies, particularly if they have set up trusts to mitigate IHT. Revising existing trusts or considering new strategies to preserve wealth for future generations may be necessary.Individuals may need to revisit how they structure their retirement savings and wealth transfer strategies. Pension planning will become more complex as the tax advantages of holding significant wealth in pensions are reduced. Alternative methods of passing on wealth, such as gifting or establishing trusts, may need to be considered to mitigate future tax exposure.

2. Impact on Agricultural and Business Property Relief

Changes in IHT may affect reliefs for agricultural and business properties, potentially leading to an increased IHT liability for family-owned businesses and farms.

Impacts on Family Law and IHT Planning:

• Intergenerational Wealth Transfer: Families with agricultural or business assets may need to rethink their succession plans to ensure that these assets can be passed on without incurring prohibitive IHT costs. This could lead to more disputes in family law over asset division during divorce or inheritance disputes.
• Valuation and Settlement: As businesses may be valued higher due to potential changes in reliefs, this could complicate divorce settlements where business assets are involved. Understanding the value and IHT implications of such assets becomes crucial for equitable distribution.

3. Pensions and Divorce Settlements

With pensions becoming part of the taxable estate, divorce settlements involving pensions may need careful IHT considerations.

• Pension Division: The treatment of pensions in divorce may become more complex, with increased focus on their IHT implications. Courts may need to consider the tax burden on pension funds when determining how to divide assets fairly.
• Spousal Maintenance: If pensions are subject to IHT, this may influence spousal maintenance calculations. The receiving spouse may argue for a larger share of other assets to compensate for potential IHT on pension benefits.

4. Child Welfare and Financial Planning

The budget’s economic policies could influence family financial planning, particularly concerning children’s welfare.

• Child Maintenance Adjustments: Changes in economic circumstances, particularly in light of potential cost-of-living increases, may prompt requests for modifications to child maintenance orders. Courts may need to consider these changes in financial circumstances when addressing maintenance disputes.
• Educational Costs and IHT Planning: Families may need to reassess their financial obligations concerning children’s education in light of potential IHT changes. This could lead to more disputes over schooling options in custody arrangements.

The imposition of VAT on private school fees could have a broad impact on family law, particularly in divorce cases involving child maintenance, school fee payments, and financial settlements. The increased costs may lead to disputes over schooling choices, variations in financial orders, and challenges in maintaining previously agreed-upon educational standards. Families will need to consider the long-term financial implications of private schooling in the context of divorce, and courts may face more complex cases as a result. Seeking legal and financial advice will become even more important to ensure that education-related financial obligations are handled fairly and sustainably.

5. Removal of non-domiciled (non-dom) status

From the 6th April 2025, the Labour Government will abolish the current non-dom tax status, replacing it with a new residence-based regime. Those with complex and international assets may need proactive asset protection planning ahead of this change.

It could have significant implications for wealth planning, particularly for high-net-worth individuals and families who rely on this status for tax efficiency. Non-dom status allows individuals who are resident in the UK but who have their permanent home (domicile) elsewhere to benefit from favourable tax treatment on their foreign income and gains. It could affect wealth planning in the following ways:

Global Tax Exposure

UK residents would be subject to UK taxation on their worldwide income and capital gains, rather than just on their UK-sourced income. This could lead to a significant increase in tax liabilities for individuals with substantial foreign investments or business interests.

Wealthy individuals would need to restructure their international portfolios and consider other tax-efficient jurisdictions for holding assets to mitigate the impact of higher UK taxes. Offshore trusts and foreign assets would likely need to be reconsidered as they would no longer offer the same level of protection from UK taxes.

Inheritance Tax (IHT)

Non-dom status currently allows individuals to avoid UK inheritance tax (IHT) on assets situated outside the UK. The removal of this status would mean that UK residents could be subject to IHT on their global estate, increasing their exposure to the 40% IHT rate.

This means that international estate planning would become more complex, as individuals would need to review the structure of their wealth, possibly by relocating assets or considering more complex estate planning strategies such as gifting or establishing trusts in other jurisdictions to reduce IHT exposure.

Changes in Residency and Domicile Planning

Many wealthy non-doms may reconsider their residency status, as living in the UK may become less tax-efficient.

Wealthy individuals and families may consider changing their tax domicile or exploring other residency options in countries with more favourable tax regimes. This could involve a relocation of both personal and business interests, along with careful management of residency rules to avoid dual taxation.

Families considering leaving the UK would need to plan their exit carefully, taking into account exit taxes, residency rules, and the tax regime in their destination country. Multi-jurisdictional tax advice would be essential for a smooth transition.

Trust and Estate Structures

Non-doms often use offshore trusts to shield foreign income and gains from UK tax. If non-dom status is removed, these structures may lose their effectiveness, as income and gains from offshore trusts could become taxable in the UK.

Offshore trusts would need to be restructured, possibly bringing certain assets back to the UK or moving them to jurisdictions that still provide protection. The removal of non-dom status could also lead to the unwinding of long-established trusts, which would have significant legal and tax implications.

Preparing for Change

The October 2024 Budget has substantial implications for both family law and inheritance tax planning. As the financial landscape shifts, families will need to navigate increased IHT liabilities, reassess their estate and financial planning strategies, and potentially face more disputes related to divorce settlements and child maintenance. Individuals will need to stay informed and proactive in adapting to these changes to protect their assets.

Get in Touch

For expert guidance on how the October 2024 Budget may affect your estate or family planning, contact Hepburn Delaney today. Our team of family law and inheritance planning solicitors based across Hertfordshire can work closely with you to provide tailored and personalised advice.