Posted: 31/10/2024
After months of intense speculation, the Chancellor of the Exchequer, Rachel Reeves, delivered both her own and the new government’s first Budget yesterday.
While the chancellor’s statement has significant impact for individuals and trusts and has created real challenges for some, we now at least have some certainty about those areas the government is targeting and its direction of travel.
This article provides a summary of the key proposals announced in the Budget below. Further analysis of some of the more significant measures, particularly those relating to non-domicile reform and Inheritance tax (IHT) changes, will be published shortly.
The main rates of CGT that apply to assets, other than residential property and carried interest (see below), will change from 30 October 2024:
There is no change to the rate of tax that applies to disposals of residential property.
Business Asset Disposal Relief (BADR)
The rate of CGT of 10% will continue to apply to qualifying gains of business assets up to a lifetime limit of £1 million for disposals on or before 5 April 2025. The rate of CGT will increase to 14% for disposals made on or after 6 April 2025 and 18% for disposals made on or after 6 April 2026.
Rules will also be introduced that apply to forestalling arrangements entered into in respect of unconditional but uncompleted contracts before 30 October 2024 and for BADR, where a contract is made from 30 October 2024 to 5 April 2026 and completed from 6 April 2025.
Investor Relief (IR)
The IR lifetime limit is to be reduced from £10 million to £1 million from 30 October 2024. Anti-forestalling rules will be introduced where there has been a reorganisation of a company’s shares before 30 October 2024. Where a shareholder continues to meet the conditions for claiming IR on 30 October 2024 and makes the election after that date then the share disposal will be treated as taking place at the time the election is made for the purposes of the IR lifetime limit. This means that gains will be subject to the new lifetime limit of £1 million.
Private equity - carried interest
From 6 April 2025, the rate of CGT that applies to carried interest will be 32% (an increase from the current rate of 28%). From 6 April 2026, all carried interest will be taxed within the income tax framework, which will effectively mean a higher applicable rate of tax. It should be noted that the April 2026 proposals are subject to further consultation which will run until 31 January 2025.
The announcements included a range of reforms to IHT, in particular 'making the IHT system fairer’ by applying IHT to unspent pension pots and restricting ‘agricultural property relief’ and ‘business property relief' that apply to personal estates and trusts.
Business Property Relief (BPR) and Agricultural Property Relief (APR)
Significant changes to the scope of BPR and APR have been announced. Currently, 100% relief from IHT is available on certain business interests and certain holdings of agricultural land and property. With effect from 6 April 2026:
The new £1 million allowance applies for:
For lifetime transfers, anti-forestalling provisions mean that any gift or transfer made on or after 30 October 2024 and where the person making the gift or transfer dies on or after 6 April 2026, will see the new rules apply. Presumably, lifetime transfers made before Budget day will therefore continue to benefit from the old rules, as will any gift or transfer brought into charge where the transferor dies before 6 April 2026, but this detail will need to be confirmed.
The value of certain categories of qualifying assets that qualify for 50% relief only (presumably to include AIM shares from 6 April 2026) will not contribute to the new £1 million allowance.
New rules applying the £1 million allowance will also be introduced for any trusts that hold business or agricultural property. It is expected that the £1 million allowance described above will apply to any single trust settled before 30 October 2024, even where a settlor has made more than one trust, but provisions will be introduced to spread the £1 million allowance across multiple trusts settled by the same settlor after Budget day, in a similar way to the application of the annual exemption for capital gains tax. A technical consultation will follow for the taxation of trusts and so we can expect more detail on this in 2025.
The scope of APR will be extended from 6 April 2025 to land managed under an environmental agreement with the UK government or other approved responsible bodies.
These reforms will have far reaching consequences for holders of qualifying assets. The main purpose of these reliefs, in policy terms, was always to reduce the risk of businesses and farms having to be sold or broken up in the event of a succession event, and the reliefs have provided a longstanding foundation to estate planning for family businesses, farmers and entrepreneurs. IHT on privately owned businesses and land can be paid by ten annual instalments, which may offer some assistance, but this is unlikely to mitigate the full effect of these reforms.
Inherited pension funds and death benefits
The government has announced that it will bring unused pension funds and death benefits payable from a pension into a person’s estate for IHT purposes from 6 April 2027.
Prior to the Budget on 30 October, funds held within a defined contribution pension plan were not subject to IHT on death. There were, however, varying forms of treatment depending on the age at which the member died. If this was before the age of 75, the funds held within the plan could be passed on with no tax at all to pay, notwithstanding the fact that the funds had benefitted from tax relief during the member’s lifetime. If this was after the age of 75, the funds could still be passed on free of IHT but the amounts would be subject to income tax when they were drawn down.
From 6 April 2027, any unused pension funds and death benefits payable from a pension will be brought into an individual’s estate for IHT purposes. This means that the value of the pension funds will be added to the total value of other assets and, to the extent that this exceeds the £325,000 IHT threshold and does not fall within any exemptions, will be subject to IHT at 40%.
As part of these changes, pension scheme administrators will become liable for reporting and paying any IHT due on unused pension funds and death benefits.
This brings an end to a useful tool in the estate planning toolbox and will be of concern to individuals who had planned for retirement or who had based their estate planning on the existing rules. These changes may mean not only more estates becoming subject to IHT as the pensions will fall within the estate, but also lead to people accessing their pensions earlier rather than have a larger sum fall into their estate for IHT purposes.
IHT rates, and what remains unchanged
There has been widespread speculation over recent weeks about other potential reforms to the IHT regime. It has been confirmed that transfers between spouses, rules applying to lifetime gifts and the CGT uplift on death will remain unchanged for the moment. Additionally, the allowances for the nil rate band and transferable nil rate bands will be frozen until 2029/30.
The government has announced it will increase the interest rates charged on overdue tax debts; individuals may need to consider how they cover IHT costs as a result of this proposal.
Estate planning may focus on utilising these remaining reliefs including gifts (particularly where assets subject to reduced rates of APR and BPR are concerned). Before any action is taken, careful consideration should be given as to the capital gains and practical implications of such planning; for example, controlling shareholdings in private companies. The government may also seek to bring in additional reforms to the IHT regime, which may further affect the ability to use these reliefs. Professional advice should be sought.
Individuals buying additional residential property, such as a second home or a buy-to-let property or companies and other non-natural persons, such as a trust, buying residential property have been subject to a 3% surcharge on the standard rates of SDLT.
Rates of SDLT payable by purchasers of additional dwellings and by companies will be increased by 2% to 5% above the standard residential rates. This will apply with effect from 31 October 2024.
The changes to the thresholds and associated tax rates that were due to come into force for transactions due to complete on or after 1 April 2025 will still apply, albeit at the increased rates.
Despite significant speculation that the proposed non-dom changes would be ‘watered down’, the chancellor has proceeded with a full-scale reform of the non-dom regime. The chancellor intended to introduce an ‘internationally competitive residence-based regime’ and at the same time address perceived unfairness in the UK tax system. As previously proposed, from 6 April 2025, the current domicile-based regime will change to a residence-based tax system. There are various transitional provisions and, as ever, the devil will be in the (long awaited) detail.
Individuals
The four-year FIG regime
For individuals, the remittance basis will be abolished and a new residence-based regime (the four-year FIG regime) will be introduced. To be eligible for the four-year regime, an individual must have been non-UK resident in the prior ten consecutive tax years. The regime must be claimed in each relevant year and can be claimed on a source-by-source basis.
Broadly, it will apply to those types of foreign income and gains (FIG) which are currently eligible for the remittance basis. Importantly, it will apply to distributions from non-UK trusts. The effect of an election will be that individuals will not be subject to tax on the relevant FIG. These FIG can be brought to the UK without a tax charge arising. Individuals will lose their personal allowances for both income tax and capital gains tax in any year in which an election is made.
Overseas Workday Relief will apply to foreign source employment income for a four-year period, regardless of whether those earnings are remitted to the UK. This will be subject to an annual limit.
Transitional reliefs for remittance basis taxpayers
A ‘temporary repatriation facility’ (TRF) will be introduced so that ‘individuals that have previously claimed the remittance basis will be able to remit FIG that arose prior to 6 April 2025 and pay a reduced tax rate on the remittance’.
The TRF will be available for three years from 6 April 2025 (the final tax year will be 2027/2028). The charge will be payable on designated amounts at the rate of 12% for the first two years and increase to 15% in the third year. It will not be possible to claim double tax treaty relief where non-UK tax has been paid on the FIG. There is no requirement to bring the designated amounts to the UK. Designations can be made in respect of liquid and non-liquid assets.
FIG that has been used to make qualifying business investments (under the BIR regime) will be eligible to be designated under the TRF without the need to make a withdrawal from the company.
Where other undesignated FIG are brought to the UK, even to pay HMRC, this will be considered a remittance.
Any individual who has claimed the remittance basis in a tax year after 5 April 2017 will, for disposals on or after 6 April 2025, be entitled to re-base a personally held foreign asset for CGT purposes to its market value at 5 April 2017, provided they were not UK domiciled or deemed domiciled.
Inheritance tax for non-domiciled individuals
From 6 April 2025, under the new residence-based regime for IHT, an individual’s worldwide assets will be within the scope of IHT if they have been a UK resident in at least ten out of the previous 20 tax years. Such an individual will be classified as a long-term resident. Part tax years of residence will count towards the ten-year total.
Long-term residents who become non-resident will remain within the scope of IHT for a period, which will be determined by the number of years they were resident. If an individual is resident in the UK for between 10-13 tax years, they will remain within the scope of IHT for three tax years. This will then increase by one tax year for each additional year of residence.
A spouse who is not long-term resident may elect to be treated as a long-term resident to benefit from the full spouse exemption. Once made, the election will last until ten consecutive tax years of non-residence have elapsed. This contrasts with the current position whereby a domicile election ceases after four tax years of non-residence.
Non-UK trusts
Income and gains
Any FIG that arise within settlor-interested trusts after 6 April 2025 will be taxable on a UK resident settlor on the arising basis, unless the four-year FIG regime applies to the individual.
The rules regarding distributions from non-UK resident trusts to UK resident beneficiaries remain largely the same in the sense that benefits and capital payments will be matched to relevant income and stockpiled gains in the trust structure. However, those distributions may not be taxed if the beneficiary is eligible for the four-year FIG regime, although those distributions will not be matched.
Various changes will be introduced to the transfer of assets abroad rules to take into account the removal of protected trust status.
Inheritance tax for non-UK trusts
From 6 April 2025, the excluded property status of a trust will depend on the settlor’s residence status. If the settlor is a long-term resident, the trust assets will be within the scope of IHT. This means a trust will be subject to 10-year anniversary charges and exit charges under the relevant property regime.
Where an individual settlor leaves the UK, the relevant property within a trust will become excluded property once the settlor ceases to be a long-term resident. This will give rise to an exit charge for IHT at a rate of up to 6%.
Non-UK assets comprised in a trust which were excluded property before 30 October 2024 will not be subject to the gift with reservation of benefit rules. So, the settlor of such a trust will not be subject to an IHT charge on the value of the non-UK assets in the trust on their death. However, the trust itself may be within the relevant property regime if the settlor is a long-term resident. Trusts created, or added to, after 30 October 2024 will be subject to gift with reservation of benefit charges where a settlor is a long-term resident (or in respect of UK assets, as per the current rules).
Where a settlor of a trust has died before 6 April 2025, non-UK assets will be excluded property based on the current rules, namely the settlor’s domicile at the time the assets were added to the trust.
There are various complexities and potential pitfalls which will be considered in a more detailed note.
The government has decided to press ahead with its plans and has announced that:
Standalone nursery schools and nursery classes attached to private schools (defined as ‘a class that is composed wholly (or almost wholly) of children who are under compulsory school age’) are carved out of this definition, as are further education colleagues for 16-19 year olds. Faith schools will remain within the scope of this policy.
The government has explained that ‘to provide stability and predictability for business’ – and perhaps as a consolation in light of the increase to employers’ national insurance – that the main rate of corporation tax is to be capped at 25%. There has also been a commitment to maintain the UK’s current R&D tax relief and capital allowances are separate regimes.
The small profits rate of corporation tax will be maintained at its current rate and threshold.
The chancellor stressed that the government’s manifesto promise not to increase income tax, employees’ National Insurance and VAT had been kept. However, as widely anticipated, employers’ National Insurance will increase by 1.2% to 15% from 6 April 2025. In addition, the threshold (in an employee’s annual salary) above which employers become liable for the 15% NICs charge, is reduced from £9,100 to £5,000 per year. These two changes combined place increased financial pressures squarely on the shoulders of employers and businesses.
Other changes included the taxation of employee ownership trusts, freezing of fuel duty and investment by the government into HMRC digitisation and funding investigation and enforcement teams with a view to closing the tax gap.
This Budget is just the start of the process and further announcements and legislation over the next few months are expected.
If you would like to discuss the impact of these changes or have any other concerns as a result of this Budget please contact us for further information.
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