There were more kites flown ahead of this year’s Budget than I have ever seen, which fuelled many and varied rumours.
I and many others pitched in with our thoughts and most of us got something right. However, I cannot have been alone in being surprised at the scale of the announcements.
Spending up an average £69.5bn per year from 2025-26 or 2.2% of GDP.
Additional tax revenues at £40bn, albeit the Office for Budget Responsibility (OBR) has since suggested this is an optimistic estimate.
Borrowing up, via yet another change in the fiscal rules. Fiscal rules that have changed a mere nine times in the last 16 years but will according to the International Monetary Fund (IMF) still take UK national debt from 101% of national income currently, to 108% of national income in five years’ time.
I may suggest that if this was a household budget, protection would be high on any adviser recommendations.
The budget tax headlines around employer national insurance contributions (NICs), non-doms, Stamp Duty Land Tax, VAT, Capital Gains Tax (CGT) and Inheritance Tax (IHT) have been well and comprehensively covered.
What I have seen less of is how advice will change as a result and while raising an additional £40bn will see many net losers – protection advisers, professionally at least, should not be among them.
So, what are the opportunities from this year budget for more protection business? Answer: the changes to IHT – but let’s break this down by the various new measures.
Maintenance of existing IHT thresholds
The nil rate band (NRB) and residence NRB was previously to be frozen until 2027/28. This has now been extended, freezing these thresholds for a further two years: raising £110m in 2028/29 and £355m in 2029/30.
This will increase the liabilities for some and bring more potential clients into the IHT net – clients that may be interested in funding their liabilities rather than engage in complex trust strategies or gifting outright.
Business Property Relief (BR) and Agriculture Property Relief (APR)
From April 2026 businesses and farms that previously were entirely exempt from IHT without any fiscal limit are now facing an effective 20% IHT rate over values of £1m.
Many of such businesses and the majority of farms represent highly illiquid assets, such that the only options available to meet what could be sizeable tax bills will be to borrow or sell.
Neither options will be palatable for most leaving life cover: pooling the risk, which is what life assurance is ideally placed to achieve, the only option.
With the exchequer expecting to collect £1.75bn over four years from 2026-27 that is a lot of potential cover.
Alternative Investment Market (AIM) shares
From April 2026 AIM shares will no longer be exempt from IHT after being held for two years.
However, they won’t fall into the £1m allowance and all holdings will be subject to IHT at an effective rate of 20%.
While they are likely to remain attractive to some clients the combination of lower levels of relief and increased price volatility will undoubtedly push clients to look for alternative strategies, and protection will always, rightly, be an option.
Non-domiciles
Prior to 30 October non-domiciles could avoid, with relative ease, UK IHT.
A trust established with non-UK situs assets even with the settlor being a beneficiary would not fall within the non-dom estate even if they were to later become UK domicile.
Post-30 October it will no longer be possible to set up new arrangements of this nature.
Alternative trust schemes are available but none exist where the settlor can retain total freedom of access without triggering the gift with reservation of benefit provisions. The attractions of a whole of life policy as an alternative should be clear.
The concept of domicile as a basis for liability to UK IHT will be replaced by long term residency from April 2025.
UK residency of 10 years in the last 20 (years before 2024-25 count) will bring an individual into potential charge on their worldwide wealth.
Ultimately, therefore, more individuals will be liable to IHT on more of their wealth with less ability to exclude their wealth from charge.
Even if they choose to leave the UK, they will retain a liability to UK IHT for up to 10 years. A lower term applies where they have resided in the UK for less than 20 years.
Yet again this creates opportunities for protection as the solution and for many the only viable solution.
Pensions: residual funds and death in service
This is probably the biggest opportunity of all not least based upon the exchequer’s estimate of revenue from 2027-28 when the changes take effect, to 2029-30 of more than £3.4bn.
The very fact that pension wealth transferable at death, unused pension funds and death benefits (UK register schemes QROPS and QNUPS) will be subject to IHT, creates significant additional liabilities.
Although by definition there should be sufficient liquidity to meet such liabilities, this won’t necessarily change a client’s desire to be able to cover such liabilities.
Again, protection is realistically the only option for the majority of the impacted individuals.
Bringing pensions within the scope for IHT will also fundamentally change clients IHT mitigation strategy.
Before the Budget pensions, for clients with an IHT exposure, would generally be the last assets to be accessed.
Post-Budget, even prior to April 2027, this will no longer be the case. However, I would go further.
Subject to the level of tax paid on withdrawing funds from a pension and a client’s need for them longer term, I believe a case can be made to take an income and using the normal and reasonable exemption, to make regular gifts.
To maximise the value of those gifts the income taken could be used to fund a whole of life policy in trust.
I do accept this will lead to some interesting conversations with compliance colleagues around funding a future need (the changes do not impact until 6 April 2027) and providers financial underwriters for the same reason – but as an optimist I like to think we can find a pragmatic solution.
For multiple reasons this Budget will live long in the memory.
You may not agree with the broad concept of spend more, borrow more and tax more. You may not agree with specific tax policies and the longer-term economic impacts.
But I have a feeling this could just be the Budget that brings wealth managers and protection specialists closer together than ever.