Unsurprisingly, the headlines of late have revolved around the UK budget presented by Chancellor Rachel Reeves in Parliament and the £40 Billion increase in taxes. While this is a breathtaking amount, most clients want to understand how these specific increases impact them individually. With this in mind, we have summarised below the key points of the budget that are most likely to impact you.
Some budget elements, such as including pension funds within the inheritance tax regime, are now under consultation. Implementing this area will be highly complex; therefore, we will keep you posted as developments unfold to ensure that you can make well-informed decisions regarding your financial position and estate planning.
Below is a summary of the Budget as it pertains to Individuals
- There is no increase in income tax rates. Furthermore, the chancellor announced that tax thresholds will remain frozen until 2028 but will begin to increase in line with inflation after that. This news is welcome, as it was widely expected that they would extend the threshold freeze beyond 2028. Such an extension would have resulted in more people ending up in higher rate tax brackets as their incomes continue to grow while thresholds remain frozen.
- Additionally, employees’ national insurance contributions have not increased. They remain at 8% for lower thresholds (on earnings between £12,584 p.a. and £50,000 p.a.) and 2% for higher thresholds (on earnings above £50,268 p.a.).
- The interest allowance (£1,000 for basic rate taxpayers and £500 for higher rate taxpayers) and dividend allowance (£500 for both basic and higher rate taxpayers) also remain unchanged.
- Individuals can continue to build up savings up to £20,000 per annum into an ISA without incurring income or capital gains tax.
- There were no changes made to the level of tax relief obtained at a client’s highest marginal rate when making pension contributions.
- The 25% tax-free cash lump sum, known as the pension commencement lump sum, remains unchanged, capped at £268,275.
However, one major change has come through an increase in capital gains tax on non property-related investments: for higher-rate taxpayers, it has increased from 20% to 24%, while for basic-rate taxpayers, it has risen from 10% to 18%. This adjustment means that rates on capital gains taxes for non-property and property investments have been aligned. The significant rise from 10% to 18% for basic rate taxpayers does mean additional consideration may be required when liquidating investments.
On the positive side, the £3,000 annual capital gains exemption has not been removed. This means clients can still realise £3,000 in capital gains during a tax year without incurring a tax liability.
Pension Funds to be included in the Calculation for Inheritance Tax
Another major change impacting many clients involves funds held in pension funds forming part of an individual’s estate calculation for inheritance tax starting April 6, 2027. Although this significantly affects many clients’ estate planning strategies, it does provide time for your financial planners to consider various strategies aimed at minimising their overall tax impacts wherever possible.
While many will understandably view pensions in an estate for inheritance purposes negatively, there are still some positives worth considering amidst these changes.
- Firstly, contrary to significant speculation that the chancellor was going to reduce the amount of tax-free cash you could draw from a pension down to £100,000, she did, in fact, retain the current allowance, which is 25% of the pension value up to a maximum of £268,500. As such, this continues to be an important consideration regarding the benefit of accumulating pension funds, even considering that they will be included in the estate from 2027 onwards.
- The rules relating to making gifts, which would fall out of an estate fully after seven years, were not changed. There had been rumours that this could have been increased significantly—potentially doubled—which did not materialise. As such, this can still be an effective way to help mitigate the impact of inheritance tax as part of clients’ overall estate planning.
- The chancellor did not announce any restriction on gifting surplus income out of a client’s estate, which remains an effective means of gifting funds to beneficiaries and falls immediately outside of an estate for inheritance tax purposes.
Agricultural property relief and business property relief
From April 2026, only the first £1 million will get 100% relief on the combined value of qualifying agricultural and business property. For qualifying assets over £1 million, relief will be given at 50%, resulting in an effective rate of 20%.
However, shares which aren’t listed on recognised stock exchange, including AIM shares, will be subject relief at 50% on the entire holding and will not count against the £1 million allowance. Advisers may need to review clients with larger holdings of AIM shares to decide whether the risk and reward equation still stacks up given this additional IHT cost.
The new rules will also apply to lifetime transfers from 30 October 2024. This means a gift of AIM shares before April 2026 will be a failed PET if the donor does not survive for seven years, and relief will be restricted to 50%.
Changes to the taxation of non-UK domiciles
The Chancellor confirmed that the abolition of the remittance basis and removal of the concept of domicile for tax purposes will be go ahead from the 6 April 2025. This is to be replaced with a new Foreign Income and Gains (FIG) regime which is determined by UK residency rather than domicile.
Individuals who become UK resident having been non-resident for more than 10 years will not pay UK tax on their overseas income and gains for the first four tax years of UK residence and will be free to bring these funds to the UK free of any additional tax. They will continue to pay tax on their UK income and gains in the normal way.
Currently someone who is non-UK domicile is only subject to UK IHT on assets situated in the UK. However, they become subject IHT on their worldwide assets if they become UK domicile or deemed domicile.
From 6 April 2025, IHT will apply on worldwide assets where someone is deemed to be a long-term resident. This is typically where someone has been resident in the UK for more than 10 years in the last 20 years. Where someone ceases to be UK resident they will remain subject to IHT for up to 10 years after leaving the UK.
The IHT changes will also impact excluded property trusts with the settlor long term residence status at the time of any IHT charge rather than their domicile status at outset being the determining factor on with IHT may be due.
Second Properties
Regarding landlords, it’s noteworthy that the surcharge on purchasing a second and additional property has increased from 3% to 5%, in addition to standard stamp duty on property transactions.
Unfortunately, this means that profitability has been further negatively impacted for landlords looking to purchase additional buy-to-let properties. Although property investment can be seen as a good long-term option, factors such as higher stamp duty rates and borrowing costs combined with more tenant-friendly legislation may make it considerably harder to generate historically seen levels of profitability with property investments.
Employers (including those who are self-employed via Limited Companies)
Employers have felt significant changes from yesterday’s budget. One major impact is the increase in employer national insurance from 13.8% to 15%. Simultaneously, the threshold for employer national insurance has been reduced from £9,000 to £5,000. However, there are some positive developments as well.
- A permitted employer national insurance deduction historically available only to very small businesses is now accessible to all employers and has increased from £5,000 to £10,500 per annum. Based on our initial calculations, this could mean that for smaller firms and family-run businesses, the actual impact of the increase in employer national insurance may not be as dramatic as initially thought.
- Another encouraging aspect is that rumors regarding employees’ potential levies on salary-sacrificed pension contributions did not materialize. This news is particularly important for clients who operate limited companies and can make employer pension contributions directly from their business funds. These contributions will remain unaffected by the rise in employer national insurance, providing an efficient means of withdrawing funds from the company.
Conclusion
We hope this summary clarifies key budget changes and their implications while considering aspects that have remained unchanged which are positive. As always we will continue to consider these changes together with their impact on our clients very carefully and advise accordingly.
