As the UK Budget on 30 October 2024 approaches, taxpayers are keenly anticipating potential changes that could impact their tax position.
While none of us have a crystal ball, the main areas in which change may be afoot should be understood.
For individuals, we outline below a few of the key changes we think could be on the cards. This is a non-exhaustive list.
We will be reporting further on the measures announced on 30 October, so please do stay tuned.
Capital Gains Tax
Capital Gains Tax (CGT) is, broadly, charged on a disposal of assets (like property, or shares, for example) which have increased in value during the period of ownership. Upon a sale or gift of such assets, CGT is generally either charged at 10% or 20%, or a mixture. Where residential property is concerned, the applicable rates are 18%, 24% or a mixture.
The government may consider:-
(i) Aligning CGT rates more closely with income tax rates.
The highest rate of income tax in England and Wales is currently 45%. Such a move could therefore significantly increase the CGT payable on high value sales / disposals, as well as affecting traditional forms of tax planning such as share buybacks and approved share schemes.
(ii) Changing the conditions around 'holdover relief' from CGT.
Where an individual disposes of certain business assets, or makes a gift of any assets to a trust, generally, payment of CGT can be deferred until a later date. Commonly, this 'later date' occurs when the assets are sold (generating cash to pay the tax bill) further down the line.
There may be changes to the situations in which this deferral (hold-over) process can be used.
(iii) Removing the CGT-free uplift to market value at death.
At present, upon an individual's death, there is a CGT-free uplift on all assets in their estate, to re-set the base cost of these at market value on the date of death. This effectively 'wipes out' any gain on the assets within the individual's estate up to the point of death.
This uplift could be removed, so that a deceased owner's acquisition cost remains relevant to calculating the gain on disposal post-death.
Inheritance Tax
Inheritance tax (IHT) is viewed by many individuals as a particularly controversial tax. It applies on death at 40% to the value of a UK-domiciled individual's worldwide estate in excess of the applicable 'nil rate band' allowance. Various reliefs and exemptions can reduce or mitigate the tax.
Lifetime gifts to trusts made by UK-domiciled individuals which exceed the nil rate band and are not exempt, nor subject to relief, also suffer immediate IHT at the lifetime rate of 20%. In contrast, outright lifetime gifts made to individuals (known as potentially exempt transfers - 'PETs') are charged to IHT only upon the donor's death occurring within seven years of the gift. The death rate of 40% applies to the extent the PET is not exempt, relievable, and exceeds the donor's nil rate band.
The rules around changing the tests governing 'UK domicile' for IHT purposes are expected to be refined following the budget. We have commented elsewhere on the concept of UK domicile, with a link to blogs on this topic appearing in the 'income tax' section below. Changes to the so-called 'non-dom regime' will likely affect the IHT position of individuals returning to the UK after at least a decade abroad, and those leaving the UK for that same period. This is a distinct consideration from the basis on which such individuals may be liable to tax on their foreign-source income and gains (see further below). We will comment further when changes are announced on budget day.
Where the actual mechanics of the IHT charge are concerned, it may be politically difficult for the government to increase the lifetime and death rates of the tax. These apply at 20% and 40% respectively, as indicated above.
However, some reliefs and allowances may be tweaked, such as:-
(i) The freezing of the ordinary nil rate band (already remaining at £325,000 until April 2028) may be extended.
In reality, this amounts to the allowance decreasing, due to fiscal drag. More families are likely to be 'dragged above' the threshold in coming years, assuming continued inflation.
(ii) Key reliefs like Agricultural Relief (AR), and Business Relief (BR), may be revised.
At present, AR applies to agricultural property (broadly, farms) to relieve the agricultural value from IHT entirely. BR applies to shares in non-listed trading companies and stakes in other trading businesses, to fully relieve the market value of these interests from IHT. The rate of relief applying on such interests is therefore 100%.
Lower rates of AR and BR can apply to certain tenanted agricultural property, or assets used in a trading business which are in personal ownership.
Steps could be taken by the government to reduce the current rates of both AR and BR. Business owners should be mindful of succession planning carefully around this.
At present, BR also applies to shares in trading companies listed on the AIM investment market, to encourage third-party investment in developing companies. Relief from IHT for such investments, specifically, could be restricted, or even removed entirely.
(iii) Subjecting pensions to IHT
At present, the value held within a defined contribution pension, can, upon death of the holder, pass to their nominated beneficiaries without any IHT charge. Pensions therefore present a fantastic tax-planning opportunity. Income can be contributed to them with the benefit of relief (see below), with the wealth accumulated then passed to family members without IHT. If the government brings pensions in to an IHT charge, this will therefore present a big blow to those who have invested in their pensions with a view to reducing their overall IHT exposure.
Income tax
UK-resident 'non doms' who have been in the UK for at least ten tax years will no longer be able claim the 'remittance basis' of taxation in respect of foreign income and capital gains from 6 April 2025. At present, the remittance basis allows such individuals to avoid paying UK tax on foreign-source income and gains, as long as they don't bring that income and capital to the UK.
All foreign income and gains will however come into charge to UK income tax and CGT from 6 April 2025 for non-doms who have resided in the UK for at least 10 tax years. However, we expect the rules around the periods in which foreign income and gains can be repatriated to the UK at reduced tax rates by such individuals to be more precisely outlined. Please see our series of blogs on the upcoming changes to the taxation of foreign-source income and gains of non-doms.
Rachel Reeves has repeatedly ruled out increasing income tax and national insurance contributions (on working people) in statements she has made on several occasions as well as in the Labour Manifesto.
Whilst the headline rates of tax may therefore not change, the following changes could be contemplated:-
(i) Freezing of the annual personal allowance may be extended, beyond 2025/26.
Again, fiscal drag means the majority are therefore likely to pay more income tax in this event.
(ii) Reduction of income tax relief on pension contributions.
This could also be a big change to watch out for. There have been rumblings about a flat rate of relief (at, say, 20%) being introduced. This would mean loss of 20% or 25% income tax relief for higher or additional rate taxpayers in England and Wales. For the highest earners in Scotland (who pay income tax at 48%), the lost relief could equate to an even greater 28% in such a scenario.
Concluding remarks
The UK Budget on 30 October 2024 is likely to comprise significant tax reforms that impact capital gains tax, inheritance tax, and income tax. There is inevitably a degree of conjecture in anticipating these in advance. Private clients are therefore urged to check back on 30 October 2024 in order to stay informed. Please reach out to us to allow us to assist you in navigating the changes effectively.
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Senior Associate