
Following weeks of speculation, we now know the content of the Chancellor's hotly anticipated Budget. Its content delivers the biggest single set of Budget day tax rises since 1993. We summarise below key points for clients to consider as they plan next steps:
Capital Gains Tax (CGT)
It was no great secret that headline CGT rates were likely to increase. These rumours proved accurate and the change is immediate – we now have a top CGT rate of 24%. Treasury coffers will already be buoyed by pre-Budget day disposals and the Chancellor is hoping that having resisted the urge to take CGT rates higher than 24%, transactions will continue going forwards.
Business owners will, however, be particularly disappointed to see that Business Asset Disposal Relief (BADR) is being curtailed. Long gone are the days of favourable CGT rates over qualifying gains of up to £10 million. Over recent years, the level of qualifying gains has been on a downward spiral and now it is the rate of tax that is being changed. The Chancellor has announced that the £1 million lifetime limit for qualifying gains remains in place but the rate of tax on these gains will be increasing to 14% (from the current 10%) on 6 April 2025, and then to 18% with effect from 6 April 2026. We expect to see business sales spike before these increased rates start to bite.
Mirroring this change, Investor Relief has also been curtailed. This is a CGT relief that is helpful for individuals (such as angel investors) that own unlisted shares in unquoted trading companies where they have no other connection to the company. The lifetime cap for Investor's Relief has been brought in line with BADR (i.e. £1 million of qualifying gains, down from £10 million) and the same rates of tax apply going forwards.
Separately, tax on carried interest is to increase to 32%. There is a commitment to consult on this further with an intention to draw carried interest into the scope of income tax; albeit that a bespoke rate tax is then likely to apply
Inheritance Tax (IHT)
There are some significant reforms to IHT. Rumours had been circulating that the Chancellor might extend the requirement to survive seven years from making a lifetime gift for it to become free of IHT, or remove the ability to make IHT-exempt regular gifts out of excess income. However, these remain untouched.
Instead, we have a set of radical changes for those that own business and/or agricultural assets. Assets of this nature can currently qualify for 100% IHT relief irrespective of value. This will no longer be the case from 6 April 2026. From that date, a combined cap is to be introduced meaning that 100% IHT relief will only be available on BPR/APR qualifying assets of up to £1 million. Any value above this will be taxed at 50% of normal rates (so an effective IHT rate of 20%).
We wrote earlier in the Autumn about the extension of APR to land managed under environmental agreements. The Chancellor has at least confirmed that it will honour the extension, originally introduced by Jeremy Hunt in the Spring Budget, and it will be available from 6 April 2025.
In an effort to further increase IHT revenues, shares that are not listed on the markets of recognised stock exchanges, such as the AIM, are greatly affected too. Previously, BPR was available at 100% on these irrespective of value. AIM listed shares will now get BPR at 50% and cannot qualify for use of any part of the new £1 million allowance referred to above. Falls in the AIM over recent weeks appear to have largely built-in this expected policy announcement. The Chancellor is hoping that longer term, the change of taxation will not deter investors.
Significantly, the Chancellor has also decided that from April 2027, undrawn pensions are to be subject to death taxes. If pension preservation no longer has IHT advantages, then we might expect changes to the traditional approach of individuals divesting of other assets in priority. We are yet to see the detail of this change, but expect that there will be other consequential impacts. For example, presumably the inclusion of pension value in IHT calculations will disqualify a greater number of estates from benefiting from the residential nil rate band (which tapers away once an estate is worth more than £2 million). On that note, we were not surprised to see confirmation that the nil rate band and residential nil rate band thresholds are to remain frozen until at least April 2030. This must be one of the worst examples of fiscal drag policy – the nil rate band has not increased since April 2009 and the residential nil rate band has not increased at all since its phased introduction. Freezing these thresholds means that more estates will fall into the IHT bracket as house prices and inflation continue to rise.
Yesterday's significant IHT changes will undoubtedly hit business owners and farmers the hardest. To date, APR/BPR asset owners would often retain agricultural/business assets until death in the knowledge that they could get 100% IHT relief whilst simultaneously benefiting from a CGT free up lift. A reversal in mindset is likely and we expect to see an increased shift towards lifetime gifting. It is perhaps just as well that the 7 year IHT tail on lifetime gifts has not been extended (although anti-forestalling measures mean that lifetime gifts of APR/BPR assets after Budget day are subject to the new £1 million cap if death occurs within seven years).
Stamp Duty Land Tax (SDLT)
From 31 October, the SDLT surcharge applied to those buying second homes will increase from 3% to 5%. For a UK resident buying a second property, this takes the top rate of SDLT (charged on value above £1.5 million) up to 17%. For non-residents the top rate is now an eye watering 19%. It is hard to see how this will not adversely impact the top end of the property market.
National Insurance Contributions (NICs)
The largest revenue raiser is confirmation that Employers' NICs will rise by 1.2% to 15% from 6 April 2025 and the threshold at which firms start paying NICs for an employee has been lowered from £9,100 to £5,000 per-employee, per year.
In a bid to support small businesses, the Chancellor attempted to soften the blow by increasing the employment allowance from £5,000 to £10,500. This would equate to 865,000 employers not paying any National Insurance at all next year. (This will affect private sector only – public sector employers will be reimbursed to avoid having to cut wages and / or jobs).
There is no change to employee NICs.
Income tax
Income tax rates and thresholds remain frozen until April 2028.
The impact of income tax fiscal drag should cease from 6 April 2028, when thresholds are set to increase in line with inflation again.
VAT charge for private school fees
As previously announced, VAT at 20% will be charged on private schools' education and boarding fees. From April 2025, private schools in England will also lose business rates charitable rate relief. These two policies are expected to raise £1.8 billion by 2029-30. The increase applies to school terms starting after 1 January 2025.
Non-doms
For months the Government has made it clear that they want to abolish the non-dom regime. The Budget includes greater clarity and details about how this will be achieved. Changes are to be effective from 6 April 2025 and some of the key points are as follows:
Income/gains
- For those coming into the UK, a four year 'arriver' regime is to be introduced, during which an individual's foreign income and gains (FIG) will not be liable to UK tax (whether or not remitted to the UK). After four years of UK residency, an individual will be always subject to worldwide income tax and CGT in the UK. As a consequence of the above, the remittance basis of taxation cannot be claimed going forwards.
- Individuals currently claiming the remittance basis or those who have claimed it in the past will be able to revalue their foreign capital assets to 5 April 2017 (subject to further conditions set out in the guidance) for disposal on or after 6 April 2025.
- There is confirmation of the anticipated temporary repatriation facility (TRF). This will enable taxpayers who previously benefitted from the remittance regime to bring income and gains into the UK at favourable rates. The TRF window of opportunity will run for 3 years from 6 April 2025 (an increase on the previously announced two years). The applicable rate of tax to sums designated under the TRF regime will be a flat 12% in 2025/26 and 2026/2027, increasing to 15% in 2027/2028. Importantly, an additional new feature is that former remittance basis users will be able to use the TRF regime to match relevant income and stockpiled gains against distributions from offshore trusts. This is likely to prove useful as part of restructuring exercises.
Inheritance Tax (IHT)
- Individuals are to become subject to IHT on their worldwide assets automatically if they have been resident in the UK for at least 10 out of the last 20 tax years (thereby giving them 'long term resident' (LTR) status).
- There is a concession for those leaving the UK between years 10 and 19 in the sense that their ongoing exposure to IHT will be shortened. For those that are resident for between 10 to 13 years, they will remain within the scope of IHT for three years post departure. This will then increase by one tax year for each additional year of UK residency (so for example, someone that was UK resident for 15 out of 20 years on departure, will remain in the scope of IHT for five years).
Trusts
For many non-doms the treatment of existing trusts will be a key consideration:
- Trusts set up under the existing regime (often many years ago) will be subject to relevant property regime charges if a chargeable event arises whilst the settlor is LTR. Exit charges are to apply when a settlor loses LTR status.
- Where the Settlor is not alive on 5 April 2025, or dies afterwards without being LTR at the time, excluded property trusts will remain completely outside the scope of IHT charges under the relevant property regime. This could make a material difference to the plans of a large number of families.
- There is another important IHT concession for settlors personally in that the gift with reservation of benefit rules will be disapplied where a pre-Budget day trust is settlor interested. This will prevent the value of trusts being included within a settlor's taxable estate for IHT purposes. Any new exposure to relevant property charges (as described above) may be a cost that some clients are prepared to pay.
- Income and CGT protections for settlors are to be lost from 6 April 2025. This means that where a settlor is UK resident (and not able to take advantage of the FIG regime) all worldwide income and gains within the trust will be taxable on the settlor on an arising basis. It is odd that the Government are taking their time to consult on changes to associated anti-avoidance measures (such as the motive defence and transfer of assets abroad legislation), meaning that their stance will not be known until 2026. Where this is an important consideration clients may not be willing to risk an unknown outcome, with the result that they decide to leave the UK immediately.
- The TRF regime referred to above will help those that are prepared to restructure.
Overall, the Government have to some extent listened to non-dom representations and offered partial (and welcome) transitional relief / grandfathering, and the extent to which clients will be prepared to live with the additional exposure to relevant property charges in relation to trusts may be a key factor in deciding whether to cease being resident in the UK.
The Budget has fundamentally changed the estate planning landscape for a wide cross-section of our client base. If you would like to discuss further, then please get in touch.
This article is for general information only and reflects the position at the date of publication. It does not constitute legal advice.