The Chancellor of the Exchequer, Rachel Reeves announced her budget proposals in an hour long speech on 30 th April 2024. Although a number of the proposals had been announced in advance in a financial statement made by her soon after her appointment, a number of key tax changes were revealed and we’ll outline and comment on the major areas of change and our view around how they will affect our clients.
CGT, the tax paid on profits on the sale of assets such as shares, will increase from 10% to 18% for lower rate taxpayers and from 20% to 24% for higher rate payers. This is effective on disposals from 30 th October 2024 onwards. CGT on disposal of residential property that is not the owner’s main residence will remain the same at 18% and 24%.
The lifetime limit for Business Asset Disposal Relief and has been retained at £1 million, however, the rate of CGT will raise to 14% from 6 April 2025 and further to 18% from 6 April 2026.
In recent years holding shares, funds and other financial instruments directly, i.e. not within a tax wrapper such as a pension or ISA, has become less and less attractive as the Annual Exempt Allowance for Capital Gains tax and other allowances such as the Dividend Allowance have been reduced in recent budgets.
This tax rise on CGT rates lends further to investors considering whether other tax wrappers such as ISA’s, pensions or investment bonds may better suit their circumstances and to ensure that any available losses are utilised in the most tax efficient manner.
The biggest tax rise is in employer’s NICs. From April 2025 Employers will pay NIC’s of 15%, up from 13.8%, on their employee’s earnings. The biggest surprise though was that the threshold at which employer’s NIC’s are payable was reduced from £9,100 per year to £5,000. This will mean that the NIC bill for most employers will rise significantly.
To help smaller businesses the Employment Allowance was raised from £5,000 to £10,500.
This means that employers whose NIC bill is less than £10,500 will be exempt from paying any.
There will be no change to employee’s or self-employed NIC’s.
For our business owning clients this may have implications around profit extraction and the most efficient method. The calculation is usually between salary & bonus versus dividends. Depending on the businesses and clients circumstances this change may possibly tip the scales in favour of the use of dividends.
However, given no changes to tax relief on pension contributions, employer pension contributions still remain a very tax efficient starting point for profit extraction.
Nil rate band, the Residence Nil Rate Band, and allowances remain the same, as do rates payable at 40%. The current thresholds were frozen until 2028, this has been extended to 5 April 2030.
One of the two major changes included the announcement that unused pension funds and death benefits from pension funds will form part of a deceased person’s estate for IHT from April 2027.
The other major change was to Business Property Relief (BPR) and Agricultural Property Relief (APR).
The current position was that broadly speaking the value of a trading business, or an interest in a business, and unlisted shares in a trading company received 100% relief from IHT, i.e. 0% rate of tax. A 50% relief applied to some other forms of assets used in the business.
Agricultural property relief was available for agricultural land growing crops and rearing farm animals and farm buildings and received 100% relief as BPR.
From the 6 th of April 2026, the 100% relief for both BPR and APR will be limited to a combined allowance of £1 million. The excess above £1 million will be eligible for 50% relief, an effective 20% IHT tax charge. The 50% rate applying to some business and agricultural assets remains the same.
This allowance will cover both transfers during lifetime and the value in the death estate.
Any assets that would have qualified for 50% relief do not use up the new £1 million allowance.
The allowance also applies to trusts. Most trustees are subject to an IHT charge of up to 6% every 10 years on the value of property held in a trust. On property leaving the trust they are also subject to an exit charge. The new allowance will apply to both these charges, however further detail is expected early 2025 on exactly how this will be applied.
Reintroducing pensions back into estate valuations for IHT will effect the majority of clients. With pensions typically being the second larger asset for most clients, when combined with the family home this will drag a significant proportion above the possible £1 million of available Nil Rate Band and Residence Nil Rate Band.
To summarise the available IHT bands. An estate valued up to the nil-rate band (NRB) of £325,000 can be inherited without IHT. Any unused NRB of an individual can also be passed to their surviving spouse or civil partner. A further residential nil-rate band (RNRB) of up to £175,000 is available to reduce the value of an estate if a family home is left to direct descendants. Like the NRB, an amount of up to 100% of the unused RNRB can be passed on to a surviving spouse. A potential combined NRB and RNRB of up to £1m may therefore be available for a married couple whose joint estate is worth £2 million or less.
In addition to simply dragging clients into the prospect of facing an IHT liability, this measure may reduce the allowances available as the Residence Nil Rate Band is tapered by £1 for every £2 the estate value exceeds £2 million. As a result of pensions being included in the estate value this could result in the reduction or loss of the RNRB.
A common strategy used to preserve pension funds due to the previous IHT exemption was to leave this tax wrapper until last to fund retirement income. This will likely need to reviewed moving forward. In addition, utilising annuities, which do not form part of an individual’s estate could become a useful strategy in income generation and IHT planning.
The changes in BPR and APR will have a significant impact for owners of private business and agricultural assets. If the owner intends to pass on their business or farm intact for future generations early planning will be required in order to either reduce or remove the IHT bill through possible early gifting or considering how to meet the IHT bill the family will now face.
Reviewing your IHT exposure is now crucial for those with pension funds, agricultural land or high value business assets.
One of our qualified and regulated advisers would be very happy to discuss your requirements.
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