In the months leading up to the General Election promises were made that the 3 main taxes, income tax, national insurance and VAT would not be increased. There were various statements made to support the “working person” to satisfy them that there would be no increases to those main taxes.
Following the election, in the lead up to the UK Budget, speculation about potential changes was rife – without being able to raise the main taxes, where was the extra revenue going to come from?
Much had been spoken of the need for those with the broadest shoulders to carry more of the burden. I am not sure anyone can argue that isn’t a fair principle, but care is needed to make sure the burden isn’t unbalanced, so that those broad shoulders continue to generate wealth and employment opportunities, and support a vibrant, growing and dynamic economy.
So, what did the Budget contain?
Capital Gains Tax
The increases to Capital Gains Tax (CGT) were not as high as had perhaps been expected. This may be seen as the government’s realisation of the need to foster a positive environment for entrepreneurship and encourage investment and risk taking to incentivise growth in the economy.
Without being able to raise the main taxes, where was the extra revenue going to come from?
The rates of CGT increased from Budget Day, with main rates increasing from 10% and 20% to 18% and 24% respectively. There is a lower rate for transactions that qualify for capital gains chargeable under the Business Asset Disposal Relief rules or those chargeable under the Investors Relief rules – that rate which is currently 10% will increase to 14% for disposals made on or after 6 April 2025 and the rate will increase again to 18% for disposals made on or after 6 April 2026. So far not too bad.
Inheritance Tax
The changes to the Inheritance Tax (IHT) regime are a different matter and for some families will be very significant.
The nil rate band for IHT, which has been frozen at £325,000 since 6 April 2009 is set to remain fixed until April 2030. The residence nil rate band which is relevant for estates worth less than £2 million and where the main home is left to direct descendants, will be frozen for the same period at £175,000. The expected inflation in asset values during those two years means that a further 4,500 estates are likely to fall within the scope of IHT than would otherwise have done so.
Currently the value of qualifying property can be relieved from IHT at 100%.
The Chancellor also announced significant changes to both Agricultural Property Relief (APR) and Business Property Relief (BPR). APR applies to land and property used for agricultural purposes while BPR applies to business assets, including partnership interests and shares in unquoted companies, providing they are not mainly carrying on investment activities. Currently the value of qualifying property can be relieved from IHT at 100%.
From April 2026 there will be two levels of relief available. The first £1 million of value will continue to be fully relieved at 100%. Any additional agricultural value or qualifying business property within the estate will be relieved at 50% of the value. This provides an effective rate of IHT of 20% on values above the £1 million threshold which would previously not have suffered IHT.
In addition, the value of shares which are not listed on a recognised stock exchange (currently qualifying for 100% BPR) will only qualify for 50% BPR. The £1 million 100% relief allowance will not be available. This will halve the amount of IHT relief available for shares held on the Alternative Investment Market (AIM).
The media has extensively covered the potential negative impact on the country’s farmers, but these changes also impact the owner managed business (OMB). Generally speaking, it falls to the next generation to pick up the tab for an increase in the IHT exposure. It will take some time to work out how best to deal with that and for any business owners adapting to an increase in their exposure to tax, it will need a fresh approach and a clear head to work through the options.
There is time before these changes take effect so a clear head and a calm review will be the order of the day.
It is likely that these changes will turbo charge succession planning conversations. It is still possible to make lifetime gifts to individuals, known as Potentially Exempt Transfers (PETs), and provided the donor survives 7 years, those gifts will fall outside of the estate for IHT purposes. Where assets are being gifted rather than cash, do be careful that a CGT and/or a Stamp Duty Land Tax liability is not triggered.
The IHT changes don’t take effect until April 2026 so there is time until they come into force. In the meantime, anyone who thinks they may be affected should seek professional advice.
As a final comment on IHT changes, for non-UK domiciled individuals the Government has confirmed the move to a new residence-based test for IHT. From 6 April 2025, the test to determine whether non-UK situated assets are within the scope of IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years. If they are considered a “long-term resident”, they will be liable to IHT in respect of their worldwide assets. Where individuals leave the UK, a “long-term resident” will remain fully within the scope of IHT for a number of years, even after ceasing to be a UK tax resident.
It was the ultimate in Budgets. For those looking at the potential increases in the CGT rates, it wasn’t as bad as feared, but for OMBs, those owning agricultural property and those with unspent pension assets, 30 October 2024 was not a good day. The 2020s have been a volatile decade so far, with a pandemic, inflation, and global unrest. A period of much less drama will be very welcome. Until then, there is time before these changes take effect so a clear head and a calm review will be the order of the day.
What does the long-term environment look like for personal taxes in the UK? We are told that the bad news was delivered on 30 October 2024 and there are no plans to increase the tax burden any further. Let’s hope that the growth and increase in productivity that underpins those plans, materialises.
The information provided in this article is of a general nature and is not a substitute for specific advice with regard to your own circumstances. You are recommended to obtain specific advice from a qualified professional before you take any action or refrain from action.
Saffery is an award-winning firm of chartered accountants and business advisors in the UK. The firm acts for clients across a variety of sectors.
