Autumn Budget 2024: Individuals

The immediate increase in Capital Gains Tax (CGT) to 24% at the higher rate (18% lower rate) is surely less than many expected and brings this in line with rates for disposal of residential property. There was small relief for businesses in that Business Asset Disposal Relief was protected at least in the short-term on the first £1 million at 10%. This will however increase to 14% and 18% for disposals made on or after 6 April 2025 and 6 April 2026 respectively.

Who does this affect and how?

The biggest blow will be to the change in business relief on inherited assets. Family businesses have been secure in the knowledge that on death, 100% of the value of their businesses were protected from Inheritance Tax (IHT) but that will now change. From April 2026, for businesses valued at over £1 million, only 50% of the value will be available for relief creating an effective rate of IHT of 20%. This withdrawal of relief will also apply to shares in AIM portfolios, which will affect some investors.

In addition, the Chancellor removed relief from IHT on unused pension funds in their entirety from April 2027. Pension funds have in recent years been a significant tax-free asset to be passed down to beneficiaries.

These changes will have a significant impact for families. It means that existing plans for intergenerational wealth protection will need to be revisited and those that have relied on these reliefs will need to do some planning. It will also change future succession strategies given that CGT and IHT rates for business assets will be much more closely aligned. We may see an acceleration of lifetime gifting of assets across generations and the use of Trust structures and Family Investment Companies are likely to become more popular given the control that they can afford.

Action to take

What is important is that families take action now to secure their wealth for future generations before some of the changes are implemented.

The Stamp Duty Land Tax (SDLT) surcharge on second homes will increase from 3 to 5% from tomorrow (31 October 2024), and Capital Gains Tax (CGT) rates on non-residential property has increased by 4% from 10 to 20% to 18 to 24% from today (30 October 2024). There are no changes in non-resident surcharge or Corporation Tax rates, and no further announcements regarding planned abolishment of the furnished holiday let rules from April 2025. Business Asset Disposal Relief (BADR) for developers will remain, although the 10% rate will be adjusted to 18% in the period to April 2026.

From April 2026, Business Relief and Agricultural Property Relief will also be restricted so that 100% relief applies for the first combined £1 million, and only 50% thereafter.

Who does this affect and how?

Private commercial property investors will immediately feel the pain of an increase to the CGT rates, although an increase of 4% on the top rate is surely less than some had feared, and the top rate of tax for corporate investors will remain the same. The increased SDLT surcharge will further dissuade smaller scale residential property investment and encourage larger property transactions that might benefit from the lower non-residential rates.

For larger farmers and business owners, the Inheritance Tax (IHT) relief restriction will result in some significant changes as the tax, payable within six months of death or over up to 10 years on an interest-bearing basis, attaches to illiquid assets.

There have been so many other possible changes that have been mooted in advance of this Budget, including reform or reduction in the availability of main residence relief, abolishment of BADR for property developers, or SDLT changes on mixed use. Many clients will be relieved that significant changes in these areas, at least for now, have been shelved. What is unknown is how the confirmed abolishment of the non-domiciled rules from April 2025 will impact on the high-end residential property market.

What's next?

Overall, this change does add further pain to the property sector, but with favourable reform to planning rules, we would hope that this increased pain is more than offset by opportunities and clarity/certainty of the tax position going forward and help spur the property market forward again after what has been a difficult period.

The IHT change will force more businesses and landowners to consider a sale of their assets following death to fund the tax, or alternatively consider earlier succession planning. As things stand, it is still possible to make lifetime gifts without immediate tax charges and not rely on the reliefs, and holdover relief for CGT purposes has been preserved.

The widely-trailed increase in employers’ National Insurance Contributions has now been announced by Rachel Reeves.

Family and Owner-Managed Business (FOMB) employers over the UK tend to take such increases personally and will probably already have considered their response. It is difficult to see how future pay awards and employment levels will not be affected by this government-mandated rise in employment costs from a marginal 13.8% to 15.0%. The government has consistently told us more tax revenues are needed to set the public finances in order and so the announcement will have surprised few.

What’s next?

In the short term, FOMB businesses are likely to respond with some restrictions to pay growth outside of the mandated rises to National Living Wage to £12.21/hour which will take effect from April 2025. Officially, unemployment remains low, indeed at a lower level than overall job vacancies, however behind the statistics there are stories of labour market disfunction, skills shortages and younger applicants experiencing difficulties finding work.

Business people are nothing if not resilient and looking ahead they are likely to build augmented employment costs into their business models and will continue to turn a profit, perhaps even taking some short-term pain in order to perhaps benefit from the ‘kickstart growth’ agenda in the medium term.

With taxes now reset, albeit at levels approaching a post-war high, the challenge will now begin for the new Labour administration. Real-terms growth, perhaps in excess of official projections, will need to become a reality and Labour will need to demonstrate some sort of upside from the tax revenues invested; be that in housing, health outcomes or economic benefits felt by the majority.

We knew that the tax treatment of non-UK domiciled individuals (non-doms) would change significantly from April 2025, replacing the existing domicile-based regime with one based on residence. After waiting for nearly seven months from the initial announcement in the Spring Budget and having since had a change of government, we finally have the detail on how the new regime will work.

Who does this affect and how?

The changes affect current non-doms, recent and future new arrivers in the UK and Trustees and settlors of existing offshore Trusts.

The changes will take effect from 6 April 2025, largely (but not entirely) as anticipated. 

• New arrivers will be able to take advantage of 100% relief from UK tax for Foreign Income and Gains (FIG) for their first four years of residence, provided they have not been UK resident in the 10 tax years immediately prior to their arrival. 
• The Temporary Repatriation Facility allowing remittance basis users who are not eligible for the four-year FIG regime to remit pre-6 April 2025 FIG has been extended to cover remittances in the three years to 5 April 2028, including benefits received by UK resident settlors and beneficiaries of non-UK Trusts. 
• Current and previous remittance basis users can rebase personally held foreign assets for Capital Gains Tax purposes to 5 April 2017 for disposals after 5 April 2025. 
• As feared, the existing protections from tax on FIG arising within settlor-interested Trust structures from 6 April 2025 will no longer be available for settlors who do not qualify for the four-year FIG regime. 
• In addition, non-UK assets held in Trusts will only remain excluded property for Inheritance Tax (IHT) purposes while the settlor is not-long-term UK resident. 
• Non-UK assets held by an individual will fall within the scope of IHT where they have been UK resident for at least 10 of the previous 20 years. However, the previously trailed 10-year tail on departing the UK only applies where the individual has been resident for at least 20 years before departure with the time those assets remain in scope of IHT after leaving the UK being tapered where resident between 10 and 19 years. 
• From 6 April 2025, Overseas Workday Relief will be available for employees eligible for the four-year FIG regime.

What's next?

A further article will follow shortly outlining the changes in further detail and proposing some planning suggestions in advance of the new regime coming into effect from 6 April 2025.

For all residential transactions effected from 31 October 2024, the additional dwelling surcharge for SDLT will be increased by 2% to 5% and where a corporate acquires a residential dwelling of more than £500,000 and pay the higher rate of SDLT (flat rate of 15%) due to no relief, this has been increased to 17%. Considering, the non-resident surcharge, Purchasers could now be paying SDLT of 19% on acquisition of residential property.

This affects individuals who own more than one residential property, Corporates and Trusts who own residential property in England and Northern Ireland.

Given the large gap between residential and non-residential rates of SDLT, now at 14%, ensuring that the transaction has been correctly classified for SDLT purposes has become even more important, whether the transaction can be seen as mixed use and/or if the ‘six or more dwellings’ rule should apply.

What's next?

The Labour Government had outlined in its manifesto that it would increase the non-resident surcharge but has instead undertaken to increase the additional dwelling surcharge, which applies to resident and non-resident Purchasers. Given their commentary regarding home ownership, the increase is not unexpected but clearly will impact more people and businesses.

There are several changes that will apply to Employee Ownership Trusts (EOT) transactions and ownership from 30 October 2024, following the consultation undertaken in July 2023.

• Restrictions on control of the EOT following the acquisition by the EOT.
• Requirement for the EOT to be UK resident at the time of the acquisition by the EOT.
• Significant extension to the period in which the Capital Gains Tax (CGT) relief can be withdrawn from the individual in relation to the transaction if the EOT conditions are breached.
• Welcome confirmation that the company contributions made to the EOT to fund the transaction will not be charged to income tax, albeit with several conditions.

This will affect business owners who may be considering this succession strategy, and indirectly their employees, will need to consider changes to the existing rules in relation to the sale of a business to an EOT and their continuing qualification for the CGT relief.

HMRC undertook a consultation in respect of the ‘Taxation of Employee Ownership Trusts and Employee Benefit Trusts (EBT)’ that closed on 25 September 2023. As a result of this consultation, several measures have been implemented.

HMRC state that the “key principles underpinning those reforms are to ensure that the favourable tax treatment remains available to those who use EBTs and EOTs for the intended policy purposes, whilst preventing tax advantages being obtained through use of these Trusts outside of these intended purposes”:

• restriction on former owners or persons connected with former owners retaining control of a company post-sale to an EOT by virtue of control of the Trust
• require that the Trustees of an EOT must be UK resident at the time of disposal to the EOT
• confirmation in legislation that contributions made by a company to an EOT to repay the former owners for their shares will not be charged to income tax as a distribution
• ease the EOT income tax-free bonus provisions to allow bonuses to be awarded to employees without directors being included
• extend the period of time within which the relief can be withdrawn from the former owner if the EOT conditions are breached post-disposal, to the end of the fourth tax year following the tax year of disposal
• require that the Trustees must take reasonable steps to ensure that the consideration paid to acquire the company shares does not exceed market value
• require that individuals provide within their claim for CGT relief information on the sale proceeds and the number of employees of the company at the time of disposal
• confirm in legislation that the restrictions on connected persons benefiting from an EBT must apply for the lifetime of the Trust
• only allow the Inheritance Tax (IHT) exemption for EBTs where the shares have been held for two years prior to settlement into the EBT
• require that no more than 25% of employees who are able to receive income payments from an EBT should be connected to the participators of the company.

What's next?

With the increase in CGT rates, the retention of the overall benefit of a sale to a qualifying EOT will be a welcome relief to many business owners thinking of the best way to ensure business continuity and a successful succession plan.

While some of the changes made restrict the potential options for a seller to an EOT, owners will need to consider the need to meet the qualifying criteria for an extended period post transaction, when spending their hard-earned proceeds.

The overall impact is a positive one given the increase in CGT on a third party exit also announced in the Autumn Budget.

The chancellor confirmed that inherited pensions will move into the scope of inheritance tax (IHT) from April 2027.

Private pension funds have been seen as a useful tool for estate planning, albeit the existing rules did appear overly generous to some.

The value of the pension fund on death will now be added to the total value of other assets and if over the IHT threshold of £325,000 (aside from other exemptions) will be taxed in the same way at 40% on the excess.

Some firms have taken the view that other assets such as ISAs and other forms of saving should be accessed before touching pensions but that had always felt like a risky ‘all or nothing’ strategy, as these changes prove.

We suspect that we will begin to see more individuals accessing their pension funds earlier to prevent them from becoming part of people’s IHT bill at a later date and, with annuity rates still looking more attractive than they have done in recent years, the certainty of guaranteed income may now have increased appeal.