After months of speculation, we can now work through the new tax landscape we find ourselves in following the Autumn Budget on 30 October. The dust is still settling and much of the detail is still to be unpacked and refined (with various consultations to follow in the coming months) in Chancellor Rachel Reeves’ attempt to raise £40bn in taxes. Some key takeaways:
- Inheritance Tax
- The current “general” IHT nil rate band will remain frozen at £325,000 until 2030. The residence nil rate band will also remain frozen.
- In a significant change, the value of unused pensions and death benefits, generally held in SIPPs, will be included in an individual’s estate for IHT purposes from 6 April 2027, whereas previously these assets were normally treated as outside an individual’s estate. This could impact a significant number of clients and increase their IHT liability, although an IHT exemption will apply where assets pass to a surviving spouse or civil partner. A technical consultation is to run until 22 January 2025 to consider how these rules will work in practice.
- From 6 April 2025, the scope of Agricultural Property Relief will extend to land managed under an environmental agreement with, or on behalf of, the UK government, devolved governments, public and certain other bodies.
- In another fundamental change, from April 2026 only the first £1 million of assets qualifying for Agricultural Property Relief (APR) and Business Property Relief (BPR) at 100% will qualify for full IHT relief. The excess above this will receive relief at a reduced rate of 50%, with IHT at 40% charged on the remainder (essentially a 20% IHT rate on APR/BPR asset value in excess of £1 million). Where an estate consists of assets qualifying for both APR/BPR, the £1m threshold will be shared pro rata between those assets which qualify for each relief, although we have not yet seen the detail. The 50% BPR rate is likely to cause significant cash flow issues for many land and business owners and in extreme cases could potentially force sales following an owner’s death. There is the possibility of paying the tax over 10 years but that still requires money to be found.
- Certain unlisted shares which currently qualify for 100% BPR (e.g. some shares on the Alternative Investment Market) will receive BPR at only 50% but will not be set against the £1m allowance. It was fairly widely speculated that BPR on these investments might be removed entirely and the FTSE AIM 100 market increased by c. 4% on Wednesday following the Budget, presumably because the tax impact was not as significant as expected.
- The £1m APR/BPR allowance will not be transferrable between spouses and civil partners and so it will be necessary for individuals to revisit their Wills and succession planning more generally to make sure these allowances are used and to consider from what assets any IHT liability should be met.
- Lifetime gifts of APR/BPR assets made after 30 October 2024 will be impacted by the new rules. For example, if an individual makes a gift on or after 30 October 2024 and dies after 6 April 2026, then a maximum of £1m would qualify for 100% relief, with the balance qualifying for 50% relief, assuming the relevant APR/BPR conditions are met.
- There will be a consultation next year on how the new rules affect trusts. There will however be anti-forestalling rules aimed to tackle transfers of APR/BPR assets into trust from 30 October onwards. Essentially, it appears that the £1m allowance will be divided by the number of trusts the settlor has established, to reduce any tax benefit in transferring assets to multiple trusts. Trusts created before 30 October will each have a £1m allowance when calculating any IHT liability after April 2026. Reviews of trusts before April 2026 may be necessary.
- Capital Gains Tax
- CGT rates will increase immediately from 10% to 18% (basic rate) and 20% to 24% (higher rate). This essentially equalises the rates applying to residential property and other assets for higher rate taxpayers. The level of the increase is not quite as drastic as had been feared by some and in some further positive news, the CGT uplift which applies on death has been retained.
- Business Asset Disposal Relief (BADR) will increase from 6 April 2025 from 10% to 14% and then from 6 April 2026 to 18%. The lifetime limit of £1m will remain.
- Income Tax
- No increases in the income tax thresholds, rates or NICs for “working people”. The Chancellor stated that the thresholds will increase from 2028. Different thresholds and rates already apply in Scotland and may be reviewed in the Scottish Budget on 14 December.
- The National Living Wage (for employees aged 21 and over) will rise from £11.44 to £12.21 per hour in April 2025. The other age-specific bands for those under the age of 21 will also rise.
- Employer NI contributions will increase to 15% from April 2025, together with a substantial decrease in the threshold above which these are payable, from £9,100 down to £5,000. The Employment Allowance will increase from £5,000 to £10,500, in a move to reduce the impact on smaller businesses.
- Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) schemes, which offer various tax incentives, are to be extended.
- Furnished Holiday Lets – the abolishment of the specific tax treatment for these (announced by the previous Government) will proceed, effective from 6 April 2025.
- Stamp Duty Land Tax
- The surcharge on the purchase of second homes in England and Northern Ireland will increase from 3% to 5%. This is still lower than Scotland’s equivalent 6% “Additional Dwelling Supplement” charge. We will wait to see what might happen here in the Scottish Budget.
- An increase to the single rate of SDLT payable by companies and certain other corporates (but not individuals) acquiring dwellings for more than £500,000, from 15% to 17%.
- Other notable points
- VAT on school fees – as previously indicated, will commence from January 2025. Early payments will not circumvent these changes.
- The concept of “domicile” is to be scrapped from a tax standpoint and will be replaced by a system based on tax residence. A technical note has been issued along with draft legislation. This will have knock on effects for a number of taxes including IHT in addition to the taxation of income and gains for certain individuals and trusts.
It was widely predicted that the Autumn Budget would bring with it significant tax changes and that is one of the few predictions in the run up to 30 October which proved to be entirely accurate. The detail, and in particular, the longer-term implications for individuals, businesses and their longer-term planning against the new tax backdrop will take some time to unfold.
