Rachel Reeves’ Autumn Budget 2024 introduced significant changes to UK capital taxes, which will have far-reaching implications for many clients.
The changes will particularly impact rural and landed estates businesses, as well as entrepreneurial and family business owners.
Whilst the changes to capital gains tax were relatively limited in light of pre-budget speculation, the changes to the inheritance tax regime were more substantial. This will prompt many people to revisit their estate planning over the coming two years.
Introduction of a £1 million combined allowance on the value of assets qualifying for agricultural and business reliefs, effective from 6 April 2026.
Currently, the value of agricultural and business assets can qualify for inheritance tax relief at a rate of 100%. From 6 April 2026, this 100% relief rate will be capped at £1 million in addition to other nil rate band allowances. Assets exceeding this limit will qualify for a 50% relief rate, resulting in an effective inheritance tax rate (IHT) of 20%. The new 'relief allowance' will not be transferable between spouses.
Anti-forestalling measures will apply to gifts made and trusts created between 30 October 2024 and 6 April 2026.
Additionally, the 50% relief rate will apply to AIM-listed company shares without using up the £1m allowance.
These restrictions are expected to significantly impact the rural, landed and business communities. Farms, landed estates and businesses that would have previously qualified for IHT relief in full may now have significant assets exposed to inheritance tax. While we await the government’s technical consultation and draft legislation as to how these measures will be implemented, an early indication is that they may prompt clients to consider earlier outright gifting to family members during lifetimes, limited gifts to trust, but possibly the greater use of alternative structures such as partnerships and family companies.
It is likely to add a further significant layer of complex legislation to an already complex regime.
We would recommend that clients review their Wills, consider whether deeds of variation could be useful with regard to recently inherited assets and to review assets that are held in trust, partnerships and companies.
Pensions are to be brought within the inheritance tax regime from April 2027.
Under current rules, pensions can be passed on to beneficiaries upon death without being subject to IHT. However, from April 2027, this will no longer be the case and IHT will apply to any unspent pension pots on death.
For the first time, clients will have to consider their pension pots directly as part of their inheritance tax planning. This will prompt a careful consideration regarding the tax benefits of paying into their pension (which appear currently to be being left alone) against the taxation on withdrawal and any IHT charged on what they do not withdraw. This may encourage individuals to withdraw their tax-free lump sum (assuming that remains across future Budgets) as well as drawing down on that pension as fully as possible during their lifetime.
From 6 April 2025, the concept of a ‘Long Term Resident’ will be introduced. This will apply to individuals who have been a UK tax resident for at least 10 out of the last 20 tax years.
Non-UK situated assets will be subject to UK IHT when a person is a Long Term Resident. Further if a person who has created an ‘excluded property’ offshore trust (the ‘Settlor’) has or does become a Long Term Resident, the trust will be subject to UK IHT, irrespective of when assets were put into it.
The Budget also marks an end to the concept of ‘domicile’, significantly tightening the non-domicile tax regime.
These measures mark a big change to the current rules and plans of the previous government, and follow Labour’s plans to bring offshore trusts and assets into the UK IHT regime. Existing arrangements and trusts should be reviewed in light of the proposed changes.
Trustees of excluded property trusts will need to consider winding up these trusts or retaining them under the new rules. Settlors should also take steps to avoid becoming Long Term Residents, or losing that status once obtained. They will need to be non-UK tax resident for 10 years in order to do so.
From 30 October 2024, lower CGT rates will align with the highest rates, previously reserved for disposals of residential property.
Accordingly, for a basic rate tax payer, the rate applicable to gains realised within their basic income tax bands will be 18%. For higher rate taxpayers, trustees and personal representatives, the CGT rate will be 24%.
The Business Asset Disposal Relief (BADR) lifetime allowance remains at £1 million, but the current 10% applicable rate will increase to 14% from 6 April 2025 and then to 18% from 6 April 2026.
There have also been changes to the rules affecting carried interest taxation.
The changes to CGT were less severe than was feared prior to the Budget. It is surprising the government did not implement the changes from April 2025, as this may have likely driven more disposals and therefore tax revenue. However, the headline rate is still relatively low compared to income tax rates.
The phased increases in BADR rates allows a window for some business disposals between now and April next year under current rules, but overall represents a further reduction on the reliefs enjoyed by business owners on exiting a business.
For more information, please contact the private wealth & estates team.
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