March 2024 monthly update

Read our March monthly update – a roundup of the latest financial news and economic headlines.

Families shocked by surprise Inheritance Tax bills

Data from HM Revenue & Customs (HMRC) reveals that over 13,000 wealthy families faced unexpected Inheritance Tax (IHT) bills. Some of these reached as high as £1.4m. This was due to the failure of Potentially Exempt Transfers (PETs) which allow individuals to make unlimited gifts free of IHT subject to a seven-year survival period afterwards. Since many of the donors passed away within this timeframe, their families were required to pay tax on the value of the gifts on top of the remaining estate.[1]

A freedom of information request from wealth manager RBC Brewin Dolphin found that the average failed PET was valued at £156,000 – after allowances and exemptions. The top 50 failed gifts had average values of around £3.6m. Therefore, if the deceased passed away within three years, a typical bill was around £1.45m. This after even accounting for nil rate bands and other allowances.[2]

Carla Morris, financial planner at RBC Brewin Dolphin, said: “Inheritance Tax is paid by a few but feared by all. Many people resent having to pay tax on income that has already been taxed, especially at a time when they are grieving.”[3] The large number of failed transfers had come as a surprise to her. She added that more of her family clients were looking to pass wealth onto younger generations during their lifetimes rather than after death. She recommends that such individuals should begin to analyse their estate and financial planning as soon as possible to secure maximum inheritance for their loved ones. “Leave it until your 80s, and the risk becomes far greater that you [will not] survive the full seven years,” she added.[4]

If a person dies within three years of making a gift, it is charged at a rate of 40% which tapers to zero over seven years. Widely considered to be one of the UK’s most hated taxes, less than 4% of estates pay IHT but the number of families facing bills rose by 17% (to 27,000) in 2020-21. The government received a record £5.76bn during this period due to factors such as increased mortality during the pandemic and a £325,000 threshold that has remained stagnant since it was established in 2009.[5] With the frozen thresholds, affected families may pay an extra £53,000 each on average. The 2023-24 tax year looks to be the first year in which tax receipts for IHT will surpass £8bn.[6]

While there were rumours that the Chancellor would change the system in the latest Spring Budget, those have not materialised. Instead, families who face probate delays will no longer need to take out loans to pay their IHT bills. Personal representatives of estates will not have to seek commercial loans before applying for a “grant on credit” from HMRC. Probate Office delays have left beneficiaries, through no fault of their own, unable to sell properties in time to pay the taxes. As a result of the change, an estimated 1,900 of the approximately 400,000 taxpaying estates could receive the grant. This is a boon over the meagre 200 in 2020-21.[7]

A government spokesperson said that “the tax is forecast to raise almost £10bn a year by 2028-29 to help fund public services millions of us rely on daily.”[8]

UK inflation falls to lowest rate since September 2021

The UK’s inflation rate fell to 3.4%; the lowest in more than two and a half years. This has boosted hopes that the Bank of England (BoE) could cut interest rates in the summer since one of its key targets is reducing inflation to 2%. The figures were released by the Office for National Statistics (ONS). Furthermore, the new rate is slightly lower than the 3.5% predicted by analysts.[9] Economists, polled by Reuters, also expected a monthly rate of 0.7% but the headline consumer price index rose by 0.6% month-on-month. It has returned to positive territory after a -0.6% reading in January.[10]

According to the ONS, food, restaurants, and cafes were the most significant factors in the downward trend. Prices for food and non-alcoholic beverages rose by 5% (year-on-year) in February; down two points from the 7% seen in January, It is the lowest annual rate since January 2022 as well.[11] A spokesperson for the ONS commented: “the rate has eased for the eleventh consecutive month from a recent high of 19.2% in March 2023, the highest annual rate seen for over 45 years.” Furthermore, the core CPI figure is reported to be at an annual 4.5% (below the estimated 4.6%) and is a reduction from 5.1% in January. It should be noted that this figure excludes volatile food, alcohol, and tobacco prices, however.[12]

Despite this, inflation falling does not equate to prices also falling – only that they are rising at a slower pace. As such, the Labour Party and trade unions warn that many households still face a cost-of-living crisis. They cite the fact that food prices have increased by 25% since January 2022 as evidence. Fuel costs have also doubled since Russia invaded Ukraine.[13]

Indeed, the highest upward pressures still came from housing and fuel. Rents have accelerated at the fastest rate on record by 9% in the year to February (up from 8.5% in January). This is the highest annual percentage change since the data series began in 2015. “We’ve been feeling the impact of sky-high rents and unaffordable rent increases since 2021 and we have reached the very end of what we can afford,” stated Ben Twomey, chief executive of Generation Rent. “As the cost-of-living crisis apparently eases, the cost of renting crisis is continuing at pace.”[14]

Prospects for the mortgage market are vaguer. Financial markets overwhelmingly believe that BoE policymakers will not shift interest rates from 5.25%. The surprise inflation rate drop increases the chances of a shift, however, which could ease worries for mortgaged homeowners.[15] To illustrate this, picture a borrower with a £200,000 mortgage set for 25 years at a 5.25% interest rate. Their average monthly payment amounts to an estimated £1,200 but if the BoE cuts rates to 3% this year, the payments would drop to £950; saving £250 per month.[16]

In February, the BoE itself predicted that inflation is set to drop to the 2% target in the second quarter of 2024 due to decreasing energy costs. The latest ONS statistics indicate that Britain may be on track to reach that level as soon as April. Although the central bank is expected to keep rates steady in the short term, prices in the swaps markets signal traders’ predictions that they are likely to reduce benchmark rates by August at the latest.[17] Traders price the probability of a quarter-point cut by June 2024 at 60% (around the same as before the statistics were released). Two-year gilt yields are also down 0.01 points at 4.25% and the pound sterling fell 0.2% against the dollar at $1.2696.[18]

Inflation in the USA increased from 3.1% in January to 3.2% in February. Across the Eurozone, consumer prices dropped to 2.6% in February (from 2.8% in January). Increased wages in the British hotels and restaurants sectors have pushed consumer prices up. Consequently, they are due to rise further when the national minimum wage increases by almost 10% in April. Skills shortages in the business and financial services sectors have led to wages outpacing inflation as well.[19]

Chancellor Jeremy Hunt commented: “this sets the scene for better economic conditions, which could allow further progress on our ambition to boost growth and make work pay by bringing down national insurance as we work towards abolishing the double tax on work – but only if we can do so without increasing borrowing or cutting funding for public services.”[20]

Despite wage increases and recent inflation slowdown, the latest forecasts from the Office of Budget Responsibility show that per-person real household disposable incomes will not recover to pre-pandemic levels before 2025-26.[21] Therefore, Shadow Chancellor Rachel Reeves dismissed her counterpart’s claim by pointing out that “the tax burden is the highest it has been in 70 years and mortgage payments are going up.” The general secretary of the Trades Union Congress, Paul Nowak, echoed this sentiment by arguing that the decline in inflation will provide little relief for overstressed families.[22]

Minimum wage to rise

The minimum wage, known as the National Living Wage, is set to increase by more than £1 for the first time. The rate is rising from £10.42 to £11.44 an hour and will apply to employees over the age of 21 instead of over 23; younger people will also see a rise in rates that apply to them. It is hoped that this will provide a much-needed boost to 2.7m low-paid workers.[23]

The changes amount to:

• a full-time adult worker paid the National Living Wage will see a pay rise worth £1,800 per year;
• a 21-year-old, who moves from the lower rate to the main rate, will receive a £2,300 raise;
• for 18 to 20-year-olds, their pay will change from £7.49 to £8.60 per hour; and,
• apprentices will also receive an over 20% rise in hourly pay from £5.28 to £6.40.[24]

However, the legal pay floor will stay at £1,092 per year short of the “real living wage” as calculated by the Living Wage Foundation charity. Thousands of employers already voluntarily pay such rates to reflect the cost-of-living crisis, but it is not codified in law. The estimated 500,000 employees whose employers adhere to the real living wage will receive a raise to £12 per hour. This increases to £13.15 for people residing in London. Such a difference could pay for 18 weeks of food for a household or 12 weeks of housing and energy costs.[25] The charity’s statistics also show that people living in London would need more than £3,000 extra to bring earnings up to speed with the capital’s expenses. That difference could amount to almost a year’s worth of food or 23 weeks of housing and energy costs.[26]

According to the Resolution Foundation, the government-enforced National Living Wage has increased the wages of millions of Britain’s lowest earners by £6,000 per year since its introduction in 1999 under Tony Blair. In their view, this makes it the single most successful economic policy in a generation.[27] Although, the Bank of England (BoE) will scrutinise the latest change for signs of pay growth feeding inflation; even if broader pressures on the economy begin to ease. Official figures in March showed that such growth has finally begun to slow after record highs. Average earnings, excluding bonuses, rose at an annual rate of just 3.5% in the three months to January from the previous quarter.[28]

Even though the UK’s statutory wage floor is one of the highest among affluent nations, economists believe that the BoE may wait longer than other central banks to cut interest rates because the effects of further increases on falling price growth are increasingly unpredictable. Ashley Webb, UK economist at Capital Economics, noted that last year’s wage increase coincided with the biggest monthly jump in consumer prices since 1991. “The fear is that the rise this year will contribute to stickier wage growth and inflation,” said Webb.[29]

The BoE, however, predicts that the increase could move aggregate wage growth upwards by a manageable 0.3 percentage points. This figure even accounts for knock-on effects as employers tweak compensation for staff higher on their pay scales. Analysts disagree and warn that the new National Living Wage could have a bigger impact than usual on consumer prices because it will disproportionately affect industries where employers are competing for staff. All major supermarkets – including Tesco and Asda – have stated that store staff will receive at least £12 per hour from April. This figure matches the higher voluntary rate that the Living Wage Foundation calculated as a benchmark for good practice. Aldi will set its starting rate at £12.40 because it wishes to “never be beaten on pay” by its rivals.[30]

Other businesses voiced alarm about the pace of recent wage changes in an economic environment wrought with cost pressures and weak consumer demand. In response, the government published a new remit for the Low Pay Commission (LPC), which advises ministers on the minimum wage, where it will keep the pay floor for workers aged 21 and above at two-thirds of median earnings in 2025. It will monitor the effects to decide where to go from there.[31]

According to the LPC, the minimum wage is around 70% higher in real terms than when it was introduced while median hourly pay is no higher than at the onset of the 2008 financial crisis. It also believes that there is little evidence that past increases have directly damaged jobs or fuelled inflation.[32] The Resolution Foundation states that the changes represent a rise of 7.8% in real terms once inflation is taken into account.[33]

The think-tank’s published analysis of the situation argues that “other areas… from the security and intensity of jobs to the enforcement of legal rights and access to decent sick pay and maternity leave have plenty of room for improvement.”[34] Similarly, MPs are lobbying the government to invest more in getting the population back to work following sickness and/or injury. Some put forward proposals for removing the current eligibility limit for Statutory Sick Pay.

The Department for Work and Pensions stated that Statutory Sick Pay will increase alongside the National Living Wage to £116.75 per week; a factor of 6.7%. The House of Commons Work and Pensions Committee does not believe that is enough, though, and is calling for an effective 57% increase to a weekly £184.03 – in line with Statutory Maternity Pay.[35]