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Autumn Budget: Personal Tax, Capital Gains Tax and Inheritance Tax
The Budget made significant changes to inheritance tax, which is likely to impact a significant number of tax payers. More people than ever before will be impacted by what is often seen as an unfair and unpopular tax.
Taking advice has never been more important, especially with the announcements made that restrictions will apply on Agricultural and Business Property Relief and pensions will eventually be bought into this IHT regime. See below for more information where we take you through the main points.
Income Tax
Importantly, the Government will not extend the freeze on income tax thresholds. Starting in April 2028, these personal tax thresholds will be uprated in line with inflation, ensuring that workers’ earnings keep pace with rising costs.
Capital Gains Tax (CGT)
Summary of Rate Increases
As expected, Capital Gains Tax (CGT) rates are increasing with immediate effect. The current rates that apply to residential property disposals will remain unchanged at 18% and 24%.
What are the changes that will take effect from today’s date?
- The rates that apply to assets other than residential property and carried interest will increase as follows:
- 10% rate will increase to 18% and
- 20% rate will increase to 24%
- For Trustees and Personal Representatives the rate will increase from 20% to 24%
Note that any contracts exchanged before 30 October which don’t complete before 6 April 2025 will be subject to the new rates of CGT, even where the contract is unconditional.
Business Asset Disposal Relief (BADR) and Investor’s Relief (IR)
Under current rules, BADR, allows for the first £1m of gain to be taxed at 10%.
The lifetime limit for Investor Relief is being aligned to the BADR limit of £1m with immediate effect, a significant reduction in the previous lifetime limit of £10m.
Any disposals of assets that qualify for BADR or Investors Relief that take place from 6 April 2025 will mean the CGT rate will increase to 14% and from 6 April 2026 a further increase to 18%.
Any contracts exchanged before 30 October that don’t complete before 6 April 2025 will be subject to the new rates of CGT, even where the contract is unconditional.
A certain set of rules will be introduced in relation to forestalling arrangements, so where a contract is made from 30 October 2024 to 5 April 2026 and completed before 6 April 2025 the new rates of CGT will apply.
In addition, where share reorganisations have taken place before 30 October 2024 and the shareholder continues to meet the conditions for BADR on those shares now held, if an election is now made to accelerate the CGT liability, the new rates of CGT will apply.
When the initial announcement was made by the Chancellor there was some reassurance over BADR, however the graduated increase in rates over the next couple of years will mean an increased tax liability for those planning to sell their businesses after April 2025.
Carried Interest
Legislation will be introduced to increase the 18% and 28% CGT rates that apply to carried interest to a single flat rate of 32%. This rate will apply to carried interest arising to an individual on or after 6 April 2025.
Inheritance Tax (IHT)
It has been stated that 6% of estates will pay IHT this year and Rachel Reeves announced that she intends to take a balanced approach in relation to this tax.
The nil rate band, which is a threshold above which IHT is payable, typically at 40%, will remain at £325,000 until 2030. The nil rate band has been at this level since 6TH April 2009.
The residential nil rate band, which is typically available if you meet certain conditions, will still be available for those passing on a home on death to their children or grandchildren, but this tax free threshold will also remain frozen until 2030.
With the announcement in yet a further extension to the frozen nil rate bands and residential nil rate bands, means that more estates will be exposed to IHT, making lifetime planning even more important in order to reduce exposure to IHT.
Business Property Relief (BPR) and Agricultural Property Relief (APR)
With effect from 6 April 2026, the Government has announced that they will look to reform BPR and APR.
Currently relief of up to 100% is available on certain qualifying business and agricultural assets. These reliefs are in addition to the existing nil rate bands that are available.
The proposal made is that 100% relief will be available, but only for the first £1million of combined agricultural and business property and thereafter a 50% rate will apply. The increase exposure to IHT on larger businesses and farms will mean an increased pressure on liquidity on ultimate succession. Business owners and farmers should take advice on their own positions to understand the impact and put the necessary protections in place.
Agricultural and Business Property held in Trust
APR and BPR can also apply to assets held in Trust. The £1 million allowance will also apply to trustees. There will be a further consultation in early 2025 in relation to the application of this policy and we expect the devil will be in the detail.
Lifetime Transfer prior to 6 April 2026
These new rules will apply to any transfers made on or after 30 October 2024, if the donor dies on or after 6 April 2026. For example, a lifetime gift of qualifying shares of £2m made now and an untimely death on 6 April 2026 will mean that 100% relief will be available on the first £1m gifted and 50% relief on the next £1m on the basis that the recipient of the gift has retained the shares at the point of death. This means £500,000 of the gift will be subject to IHT at 40%, an effective rate of tax of 10% on £2m gifted.
AIM Listed Shares
The rate of BPR that applies to AIM listed shares and other shares designated as not listed on the markets of recognised stock exchanges will be reduced from 100% to 50% in all circumstances.
Pensions and Death Benefits
A further reform announced today included a measure to bring unused pension funds and death benefits within the value of a person’s estate for IHT purposes from 6 April 2027.
Previously most pension fund and death benefits were not subject to IHT. With effect from 6 April 2027 this will no longer be the case. This will have a major impact on retirement and wealth planning and could potentially see many individuals now subject to IHT than ever before. The knock on effect here for unmarried couples and beneficiaries could mean that those left behind are financially disadvantaged with significantly less income in retirement due to the payment of IHT on their inherited pension funds.
The delay in implementation is however welcome as this will provide some much needed time in understanding how the rules will apply as well as providing individuals time to plan for this increased tax burden.
If you have any questions on any of the subjects raised in this update, please contact our budget team to find out more.
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