Pre-Autumn Budget 2024: Individuals and firms

The new government published a paper on 29 July 2024, outlining their current thoughts on the changes to the non-dom regime. While it will largely implement the Foreign Income and Gains (FIG) regime proposed by the Conservatives in the Spring Budget (which will apply for the first four years of residence only), Labour plan to go further to remove tax advantages for non-doms.

We need to wait until the Budget on 30 October for further detail, but currently understand:

• there will not be transitional measures in respect of foreign income for existing remittance basis users
• rebasing for capital gains will be available but the date is to be confirmed
• the Temporary Repatriation Facility (TRF) may be extended to make it more attractive and it will potentially include offshore structures
• a form of overseas workday relief will be retained
• IHT looks set to apply to those who have been UK resident for 10 years and they will remain within the scope until they have been non-UK resident for 10 years.

Under the current tax rules, many lifetime share transfers in family companies, (such as to adult children) can be made without any CGT or IHT liabilities arising. This is because:

• CGT – holdover relief elections can be signed so that for tax purposes any shares gifted transfer at the donor’s base cost rather than at current market value.
• IHT – a liability would likely only arise if the donee disposed of the gifted property (or it ceased to be a trading company qualifying for IHT exemption under Business Relief) and the donor passes away within seven years of making the gift and the value of taxable assets exceeded the IHT Nil Rate Band at the time. If this were a concern to donors, it may be possible to take out a special type of insurance known as term life assurance to cover this seven-year period of risk.

If the government wants to discourage wealth transfer down generations without any tax being payable (whether that be CGT, IHT and/or even a new wealth tax), they could remove the option of making holdover relief elections and/or include the value of the shares being gifted in some form of cumulative ‘pot’ of lifetime gifts, which either results in IHT becoming payable during lifetime or upon death.

There are wider considerations related to gifting shares or other assets (whether directly or into Trust), and you should always seek professional advice specific to your circumstances if you are considering this as a way forward. For example, for companies or groups with significant cash, investment assets or property there are specific conditions which need to be met, considered and understood if a gift is not to cause a surprising and unwelcome ‘dry’ tax charge for the donor.

Speculation with property taxes has been rife. There is an expectation that CGT rates are to increase, but the timing is not yet known. Many are looking at whether it is commercial to trigger gains by transferring property now and paying tax at the current rate. Transfers between family members (non-married), Trusts and companies can, with the right planning, all achieve this. 

This change is bringing forward our clients’ succession planning, encouraging gifting sooner rather than later, which will not only trigger CGT at the lower rate, but is also good IHT planning.

We already know that Furnished Holiday Let (FHL) rules are to be abolished from April 2025, and this will bring in more income tax and CGT from those with an investment portfolio which currently qualify under the attractive tax regime.

The tax changes are likely very significant for most and perhaps make the investment much less rewarding, or at worse uncommercial.

We also expect a 1% increase in Stamp Duty Land Tax for non-UK resident individuals purchasing UK residential properties.

More extreme views have suggested that main residence relief (no CGT on the disposal of your main home) could be at risk, perhaps with a limit so relief is capped and tax paid on larger gains. Furthermore, the base cost uplift that is currently obtained on the tax-free inheritance of a property (for example from a spouse) may be abolished, which may accelerate succession planning through earlier gifting or disposal of properties.

Some areas where the new government might look to act in order to reduce the £22 billion ‘black hole’ in public finances are:

Pension and ISA Allowances

Currently an individual is able to contribute into their pension and receive marginal rate tax relief. The amount an individual can contribute into their pension is complex but can be up to a maximum of £60,000 per year gross (if no allowances are brought forward and no tapering for income applies (minimum annual limit of £10,000 where income exceeds £312,000)), providing certain individuals with 45% tax relief on contributions made. This is a relief that could raise significant revenue, especially if relief was capped at a flat 30% or even 20%.

The annual ISA allowance is currently £20,000, which allows amounts placed into a cash and stocks/shares ISA to grow tax free (income and CGT). Restricting the annual ISA limit again would again go some way to closing the funding gap.

Salaried Member Rules (SMR)

In February 2024, HMRC altered its guidance in respect of the SMR. These are a set of rules which if passed in full will mean a partner in an LLP will be treated for tax purposes as an employee, with their renumeration subject to employers’ National Insurance (13.8%). HMRC has launched a number of enquiries in respect of the SMR with LLPs in the professional services industry (covering the past four tax years). While the change in guidance is currently being clarified with HMRC, Labour could look to tighten the rules regarding SMR to bring fixed share partners into the scope of employer National Insurance.

CGT

This is currently a small proportion of the overall tax take for the government. In recent years, the annual exemption in relation CGT has been cut from £12,300 to £3,000, but CGT is still levied at a lower rate (20% top rate (excluding property and carried interest) than income tax (45% top rate). The government might look to change the rate of CGT in order to plug deficits, but if alignment with income tax was planned, we would expect some degree of inflation relief to be available.