Posted on November 13, 2024.
Club partners Charles Stanley wrote recently about what could be expected from Rachel Reeves’s first Autumn Budget as Chancellor of the Exchequer. In the run-up to the actual day this was proving to be the most unpredictable and most talked-about Budget in living memory.
As widely anticipated, the tax burden is set to rise – and in certain cases in short order. Here’s a roundup of the main Budget changes affecting personal and business finances.
Which tax changes were announced?
1. Capital Gains Tax (CGT)
Investors and entrepreneurs were braced for changes to the Capital Gains Tax (CGT) regime, either in terms of an increase in the rate of CGT or a curtailment of reliefs relating to business assets. Both fears proved well-founded.
An immediate change in the rates of CGT were announced, equivalising the rates payable on shares and other assets with those paid on property sales. These are now 18% (at the lower rate) and 24% (at the higher rate). With gains added to income when calculating CGT, large taxable gains have the potential to take someone into a higher rate tax bracket.
Business owners have more generous CGT treatment, paying a rate of 10% on the sale of an eligible business (up to a lifetime limit of £1m) by claiming Business Asset Disposal Relief. However, the regime is set to become less favourable as the reduced rate of tax is now set to rise to 14% from 6 April 2025 and will match the main lower rate of 18% from 6 April 2025.
2. Inheritance tax (IHT)
With the ‘baby boomer’ accumulation of wealth increasingly being passed to the next generation inheritance tax and gifting rules were, inevitably, in the Chancellor’s crosshairs.
Exemptions on business property and agricultural land are to be capped at £1m with a lower 50% relief thereafter from April 2026. Qualifying assets within the limit can still be passed on free of inheritance tax provided they have been owned for at least two years at the time of death. The changes will be a concern for family businesses and larger estates passed through the generations, who will now face large tax bills. From a family business perspective, more companies could be passed on at an earlier juncture.
In the past is has also been possible to roll over business relief by investing the proceeds from a business sale into AIM shares. Going forwards, AIM shares will only receive a 50% business relief reduction with no 100% relief below £1m. This effectively set the inheritance tax rate at 20% for eligible AIM shares and, consequently, it is very important that IHT planning strategies are reviewed.
Curtailing IHT relief is a disappointment to smaller and innovative companies that could look to AIM to raise investment capital as the watered-down relief will likely reduce the pool of capital available. However, there is now at least some certainty after weeks of speculation that relief could be withdrawn altogether.
Overall, changes to IHT call for earlier planning and extra thought around the use of gifting allowances, notably gifts out of ‘excess income’. At present, wealthy individuals can make unlimited gifts free of IHT if these are made on a regular basis and do not affect the giver’s standard of living, but meticulous record keeping is essential.
3. Pensions
In the weeks before today’s Budget there were several rumours swirling about how the Chancellor might change pension or ISA rules. However, there was very little on either, and with the government poised to undertake a wide review of the retirement saving landscape that is entirely appropriate. It’s vital faith and stability is maintained in the UK’s primary savings and investment vehicles with any changes fully appraised for their potential effects on retirement provision and society more widely.
However, an historical benefit of pensions was overturned: they are no longer outside your estate when calculating IHT. This upends the traditional advice to use your other savings first, leaving your pensions until last to preserve this benefit.
One is to take the maximum tax-free lump-sum cash and pass it on to your heirs. If you live for a further seven years it falls outside your estate. A second is to take as much income as you can without taking you into a higher rate tax bracket and use the gifts out of surplus income exemption to make regular payments into, for example, a Junior ISA for grandchildren.
Both of these come with longer-term considerations around care funding and the affordability of retirement given increasing longevities. It’s vital not to make any knee-jerk decisions based solely on tax considerations.
Bad news for smaller businesses
Having pledged not to increase the main taxes paid by working people, it was inevitable that taxes on businesses would come under her magnifying glass.
The major impact for businesses is the change to employers’ national insurance contributions which will rise by 1.2 percentage points. The earnings thresholds at which employers start to pay national insurance contributions was reduced to £5,000, from £9,500. However, to soften the blow for very small businesses, the government is increasing the Employment Allowance from £5,000 to £10,500.
From April 2025 the National Living Wage will increase by 6.7% to £12.21 per hour, and the National Minimum Wage for 18–20-year-olds will increase by 16.3% to £10.00 per hour.
These represent a double blow for businesses and a headache many owners could have done without, especially at a time where lots of smaller businesses are struggling with increased costs from rising inflation and higher wage demands.
We’ve already reported on the increase in the rate of CGT, but the rate of Business Asset Disposal Relief (BADR), and Investors’ Relief (IR) will also increase; firstly to 14% from 6 April 2025, and then to the main lower rate of 18% from 6 April 2026. This will be a blow to entrepreneurs, who often sacrifice their earnings knowing they will have a reduced tax rate when it comes to selling their businesses.
Looking longer term, higher rates for capital gains tax has the potential to discourage people from investing in the UK market. This could reduce overall CGT receipts in future years and impact other tax revenues, such as stamp duty. In a similar vein, it could discourage entrepreneurs from starting small and medium sized businesses which are often the driving force behind economic growth in the UK.
You’re not on your own
You also don’t have to face these issues on your own, give one of us a call, or drop us an email, and we’ll be delighted to give you a free consultation to understand your situation and talk about the sort of help we can provide.
Nick Percy-Davis
e: Nick.percy-davis@charles-stanley-co.uk
t: 0207 149 6338
Paul Shotter
e: Paul.shotter@charles-stanley.co.uk
t: 0207 149 6503
Nothing in this article should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
