Budget 2024 - Private Client Briefing

Please see below for our immediate thoughts on pertinent parts of the Budget affecting our client base but do let us know if you have any questions or there is anything you wish to discuss.

Inheritance Tax (“IHT”)

The IHT free threshold known, as the nil rate band (“NRB”), will continue to be frozen at £325,000, the residence NRB will continue at £175,000 and the residence NRB taper will continue to start at £2 million until 5 April 2030. Therefore qualifying estates can still pass on up to £500,000 and along with the qualifying estate of a surviving spouse or civil partner a couple can pass up to £1 million without paying IHT. However, with the NRB frozen since April 2009, this will see many more estates paying IHT.

There was no mention in the Budget of any change to the IHT spouse exemption, the 7 year gifting rules regarding potentially exempt transfers (“PETs”) and taper relief or any of the other currently available exemptions (other than the two reliefs mentioned below) such as gifts out of excess income, the £3,000 annual allowance, £250 gifts per person and gifts in consideration of marriage (£5,000 to a child, £2,500 to a grandchild or great grandchild or £1,000 to any other person).

Business Relief (“BR”) and Agricultural Property Relief (“APR”)

From 6 April 2026, 100% IHT relief through BR and APR will be capped at £1 million of assets (combined agricultural and business property) and over that amount, will be charged at an IHT rate of 50%. To put that into perspective, under the current rules there is no limit to the amount of either relief. 

There is still a benefit to the reliefs for assets in excess of that threshold but the rate will be 50%, making the effective rate of IHT 20%. These reliefs are very important to the long-term continuity of family farms and businesses, and where 100% relief applies that potentially secures the future of a farm or business (with all its socio-economic benefits) through the generations.  Having to fund an unexpected tax charge may put the farm or business in jeopardy.  Representative bodies had lobbied hard against the introduction of changes of this nature.

Assets automatically receiving 50% relief will not use up the allowance and any unused allowance will not be transferable between spouses and civil partners.

The allowance covers the following transfers:

• property in the estate at death;
• lifetime transfers to individuals in the 7 years before death (“failed PETs”); and
• chargeable lifetime transfers where there is an immediate lifetime charge, e.g. when property is transferred into trust.

Where the rate of relief for the agricultural property or business property is at 50%, e.g. quoted shares in company giving the transferor control, the rate of relief will not be affected by the new allowance.

The new rules will apply for lifetime transfers on or after 30 October 2024 if the donor dies on or after 6 April 2026.  This prevents what is known as “forestalling” e.g. a lifetime gift of unquoted shares of £2 million made on or after 30 October 2024 will be a failed PET if the donor dies within 7 years. 100% relief would apply to the first £1 million and 50% to the next £1 million under the new rules if the recipient owned the shares until the donor’s death and the donor’s death is on or after 6 April 2026.

In relation to AIM-listed shares and shares not listed on the markets of recognised stock exchanges, there will be no £1 million cap. These shares will instead receive 50% relief on their full value rather than the current 100% relief. This will undoubtedly make the AIM market less attractive for investors as the risk versus reward formula will be greatly reduced.  

Trusts

The trustees of certain trusts are liable to an IHT charge of up to 6% of the value of property held in a trust every 10 years. There is also an exit charge when property leaves the trust.  BR and APR can apply to property in trust.

There will be a combined £1 million allowance for trustees on the value of qualifying property to which 100% relief applies, on each ten year anniversary charge and exit charge, consistent with the treatment of qualifying property chargeable to inheritance tax on death.  Settlors may have set up more than one trust comprising qualifying business property and/or agricultural property before 30 October 2024, in which case from 6 April 2026, each trust would have a £1 million allowance for 100% relief.  

The government intends to introduce rules to ensure that the allowance is divided between these trusts where a settlor sets up multiple trusts on or after 30 October 2024.

All these changes will have a significant knock-on effect for affected owners and the detail of the changes will need to be considered carefully.  Planning done to date is likely to need reviewing and preparations made to fund future tax charges. The anti-forestalling measures outlined above mean that planning between now and the implementation of changes on 6 April 2024 may already be caught by new rules, however that does mean estate planning should not be undertaken without specialist advice.

Pensions

Unused pension funds and death benefits payable from a person’s estate will now be subject to IHT from 6 April 2027 – currently they can be left entirely free of IHT.  As mentioned above, the IHT spouse exemption is still available.  Pension scheme administrators will be liable to reporting and paying IHT due on the assets. This significantly changes the pension tax landscape and is likely to change the habits of individuals with large pension pots – i.e. take money from the pension while you are alive rather than leave it untouched and then do planning around other assets.

Beneficiaries may have to pay income tax on the pension proceeds even after IHT has been deducted if the pensioner dies after they turn 75.

Capital Gains Tax (“CGT”)

From 30 October 2024, the lower rate of CGT increased from 10% to 18% and the higher rate from 20% to 24% for assets other than carried interests and residential property.  Perhaps surprisingly, the CGT rate on residential property has not changed, remaining at a top rate of 24%.  There is still no CGT on death (known as the "free uplift").

Business Asset Disposal Relief (“BADR”) and Investors’ Relief (“IR”)

Possibly more dramatic is the reduction in the benefit of BADR (formerly known as Entrepreneurs’ Relief) which applies a lower rate of 10% on the first £1m of gain when selling a company if certain conditions are met.

From 6 April 2025, BADR will provide for a 14% rate of CGT with an 18% rate (so an overall 80% increase) for disposals on or after 6 April 2026.  This gives a short window for anyone who wants to take advantage of the lower 10% rate.

The lifetime limit for IR will be reduced to £1 million for all qualifying disposals made on or after 30 October 2024, matching the lifetime limit for BADR.

Stamp Duty Land Tax (“SDLT”)

The SDLT “second home” surcharge is increasing from 3% to 5% as of 31 October 2024.

This addition to the SDLT rates is paid by companies when they buy any residential real estate, or individuals (broadly) buying second homes.  The surcharge alone now equals the top rate of commercial SDLT.  This will be yet a further blow to the buy to let market.

VAT on Private School Fees

From 1 January 2025, 20% VAT will be charged on private school fees (also applying to boarding services provided by private boarding schools) and business rates charitable relief will be scrapped (likely to be from 6 April 2025).

For pupils with special educational needs that can only be met in a private school, local authorities and devolved governments that fund these places will be compensated for the VAT they are charged on those pupils’ fees.

Private schools in England will no longer be eligible for charitable rate (intended to take effect from April 2025).  Private schools which are “wholly or mainly” concerned with providing full time education to pupils with an Education, Health and Care Plan will remain eligible for relief.

Carried Interest

From 6 April 2026, all carried interest will be taxed within the income tax framework (albeit at a lower rate than the top 45% income tax rate), with a 72.5% multiplier applied to qualifying carried interest that is brought within charge.  As an interim step, the two CGT rates for carried interest will both increase to 32% from 6 April 2025.

Individual Savings Accounts (“ISAs”)

Annual subscription limits will remain at £20,000 for ISAs, £4,000 for Lifetime ISAs and £9,000 for Junior ISAs and Child Trust Funds until 5 April 2030.

Changes to the Taxation of Non-UK Domiciled Individuals

As anticipated, the concept of “domicile” in the UK tax system will be replaced by a system based on tax residence. The key features of the new regime include:

• Introducing a new 4-year foreign income and gains (“FIG”) regime for new arrivals who have not been UK tax resident in the previous 10 years; and

• Allowing individuals previously taxed on the remittance basis to remit pre-6 April 2025 foreign income and gains using a new Temporary Repatriation Facility (“TRF”).

The abolition of the current regime and replacement with the FIG regime will take effect from 6 April 2025, as was announced by the previous government at the Spring Budget. Rachel Reeves has however confirmed that the TRF will be extended from the previously proposed two years to three years, starting from 2025/26.

The IHT proposals connected with the new regime were the most worrying aspect for many.  Rachel Reeves has confirmed that the test for whether non-UK assets are within scope for IHT will be whether an individual has been resident in the UK for at least 10 out of the last 20 tax years immediately preceding the tax year in which the chargeable event (including death) arises.  They will be known as Long Term Residents.  The time the individual remains in scope after leaving the UK will be shortened as follows where they have only been resident in the UK for between 10 and 19 years:

• For those who are UK resident between 10 and 13 years, they will remain in scope for 3 tax years. 

• This will then increase by one tax year for each additional year of residence.  So, if a person was resident for 15 out of 20 tax years on leaving, they would remain in scope for 5 years; if resident for 17 out of 20 tax years on leaving, they would remain in scope for 7 tax years.

• There are separate rules as to whether Offshore Trust fall within the scope of IHT.  This will depend somewhat on the status of the settlor and whether they are Long Term Residents.

The confirmed changes highlight the importance of obtaining advice on your residency status, which is not always clear cut but will become the crucial connecting factor for tax purposes going forward.

For individuals exceeding 4 years of residence in the UK, the TRF represents a good opportunity to bring funds into the UK at a more favourable tax rate.  Advice should be taken in advance of 6 April 2025 on what planning can be undertaken to take advantage of this facility.

The new residence-based system is extended to trusts, now including existing trusts, where the settlor is long term UK resident.  Previously it was thought that the new rules might be limited to new trusts or additions to existing trusts on or after 6 April 2025.  Existing “excluded property” trusts may therefore come within the scope of UK IHT for the first time.

Although these changes were anticipated, the amendments, especially to trusts and IHT, will have a significant impact.  The rules will be complex and specialist advice will be required to navigate the changes.

further information

For more information on the issues raised in this blog, please contact James Ward or a member of our Private Client team.