Today’s Budget will have a far reaching impact for our clients; as always there are opportunities as well as possible costs (interest rates on unpaid tax will increase by 1.5% from 6 April 2025).
We are already working with our clients to cut through the noise and focus on what adds value and as we work through the detail these opportunities will become clearer.
Non-domiciled clients
The rules affecting non-domiciled individuals will change from April 2025, providing an opportunity for planning. The Budget papers indicate some transitional arrangements will be introduced, particularly the rebasing of assets to April 2017 and the extension of the repatriation relief (reducing income tax on remittances) to three years. Inheritance tax (IHT) will be assessed by reference to residence – IHT will apply for those who have been in the UK for 10 out of 20 years (with some transitional arrangements for those who become non-resident in 2025/26). For those leaving the UK, there will be a tiered system. Broadly, the longer you are resident in the UK, the longer the IHT tail will be.
Offshore trusts
Trustees will need to consider the new offshore trust rules now – and certainly before taking any investment or distribution decisions. The UK residence status of a settlor will be key (as we expected before the Budget). Likewise, from today, income and capital gains tax (CGT) protection for “protected settlements” will be removed. There will be no grandfathering of trusts for IHT purposes (other than some limited reliefs for trusts set up before 30 October 2024). One striking implication of the new rules where a long-term UK resident settlor leaves the UK is that trust assets of trusts they settled will suffer an IHT exit charge. Between now and April 2025 all trustees should consider their options and record carefully the reasons for the decisions that they take.
Inheritance tax
The Budget is clearly targeting inherited wealth, particularly of the non-bricks and mortar kind. Nil rate bands are now frozen until 6 April 2030 but, of key importance, the generous Business Property Relief (BPR) and Agricultural Property Relief (APR) have been significantly curtailed, with 100% relief available only on the first £1,000,000 of BPR and APR qualifying assets, 50% relief for qualifying assets thereafter, so an effective IHT rate of 20% on these. These changes will apply from 6 April 2026, but with effect from today for lifetime gifts, if the donor dies on or after 6 April 2026. This change will affect both individuals and trusts holding BPR and APR assets. The AIM market is likely to be squeezed further with BPR relief on qualifying AIM shares reduced from 100% to 50% from 6 April 2026. Pensions are set to lose their status as an IHT shelter from 6 April 2027. The key take home: start IHT mitigation planning at a much earlier age.
Capital gains tax
CGT rates have increased, although not to the levels everyone at one time feared. With effect for disposals taking place on or after 30 October 2024, the basic rate will increase from 10% to 18% and the higher rate will increase from 20% to 24%. These new rates will also apply to trustees, personal representatives and indirect disposals of residential property (which previously benefitted from the 10/20% rates of CGT).
Individuals who exchanged contracts on transactions before 30 October with completion occurring on or after 30 October will still be subject to the new rates of CGT, unless they can show that they did not time the exchange of contracts in order to take advantage of existing CGT rates. Any taxpayers potentially caught by this rule will need to make a claim on their tax returns, enabling HMRC to raise enquiries into relevant transactions.
Business Asset Disposal Relief (BADR) and Investor’s Relief (IR) currently offer qualifying shareholders and investors in private limited companies a reduced rate of 10% CGT on disposals, subject to a lifetime limit of £1 million for BADR and £10 million for IR. The CGT rate for BADR and IR disposals will increase to 14% from 6 April 2025 and to 18% from 6 April 2026. The lifetime limit for IR will reduce to £1 million, in line with BADR, with effect from 30 October 2024.
Carried interest
Carried interest will be subject to a flat rate of CGT of 32% for 12 months from 6 April 2025. As of 6 April 2026, carried interest will be brought fully within the income tax regime. However, “qualifying” carried interest will be subject to a “72.5% multiplier” which will create an effective top rate of income tax rate of 32.625%. Class 4 NIC will also apply, costing those with income in excess of £50,270 an additional 2% (based on current rates and thresholds). The government will consult on changes to be introduced from April 2026 with a view to widening the current “income based carried interest” (IBCI) rules. Expected changes include the removal of the exclusion from IBCI for employment-related securities – an often exploited loophole used to protect carried interest from tax at full income tax rates.
Stamp duty land tax
From 31 October 2024, the additional rate of stamp duty land tax for second homes will increase by 2% to a total of 5% (already owning a home anywhere in the world means that your UK house purchase will be a second home and these changes will apply to you).
Employment related taxes
As expected, from April 2025 employers’ national insurance contributions will increase by 1.2% to 15% with a reduction in the threshold at which this will be paid from £9,000 to £5,000. There will be an increase to the threshold at which employee national insurance will be paid to £10,500.
Corporation tax
A welcome confirmation was no increase in corporation tax; it will be capped at 25% for the duration of this Parliament, likewise, research & development relief and the annual investment allowance will remain at present levels.
The communication ahead of this Budget left a lot to be desired. However, we will now work with our clients within the framework we have been given and we will participate in any proposed consultations to represent our clients’ interests. We will provide commercial judgement as well as legal advice to help our clients maximise opportunities during this next stage of their journey.
If you would like to discuss any aspect of this, please call your usual contact at Fladgate.
