Autumn Budget 2024
detailed analysis
Delve into the detail of the Autumn Budget 2024 as experts from corporate tax, employment tax, VAT and indirect tax and personal tax join forces with our industry and economic specialists.
01 November 2024
Rachel Reeves’ first budget brought £40bn of tax rises but few surprises after weeks of intense speculation centred on changes to inheritance tax, capital gains tax and employer’s national insurance contributions. Will it deliver the growth and stability which the government has promised?
How does the Autumn Budget affect you and your business?
Read our detailed analysis of the Chancellor’s announcements.
- The economist's view
- Business tax
- Employment tax
- VAT & indirect taxes
- Property tax
- Private client tax
The economist's view
Budget boosts everything
This budget was the most significant in a generation with Chancellor Rachel Reeves dramatically raising taxes, spending, investment and borrowing. As a result, this budget is the largest fiscal loosening in decades. The consequences will be a temporary burst of economic growth next year, but higher inflation and a slower fall in interest rates in 2025 and 2026.
We don’t think the budget will stop the Monetary Policy Committee from cutting interest rates by 25bps next week, but it was more stimulatory than expected which reduces the chances of a further rate cut in December.
A new fiscal rule
The key headline from the budget was the £70bn a year in additional spending. That means that spending on government services will rise by 1.5% in real terms on average in the coming years, up from 1% in the March budget. However, much of this increase is front loaded, meaning that ‘unprotected’ government departments still face a squeeze beyond 2025-26, with budgets falling 1.1% in real terms on average.
It also means that government investment will rise by almost £25bn a year, keeping investment broadly flat as a share of gross domestic product (GDP) at 2.5%, rather than falling.
This extra spending will be paid for by a roughly £40bn a year increase in taxes and a £32bn a year increase in borrowing.
The majority of the extra tax revenue (£25bn) will come from raising employers' national insurance contributions (NICs) with most of the rest made up by changes to capital gains, inheritance tax and ‘efficiency savings’.
Rachel Reeves changed the fiscal rules to allow her to borrow more to invest. The first rule now aims to balance day-to-day government spending with tax revenues in 2029-30. On that metric the Office of Budget Responsibility (OBR) estimated £9.9 billion of headroom.
The second rule aims to have debt falling as a share of GDP by 2029-30, but the Chancellor changed the definition of debt to Public Sector Net Financial Liabilities (PSNFL). On this measure, the OBR estimates £15.7 billion of headroom.
The upshot is that because spending will rise by substantially more than taxes, the budget loosens fiscal policy relative to the previous government’s plans, although it does still tighten over the next five years.
Four economic consequences of the budget
There are four broad consequences for the economy from this fiscal expansion.
- First, because there is a big increase in spending in the next couple of years, economic growth is stronger. The OBR estimates that the budget lifts growth by about 0.6ppts in 2025/26, but this is a temporary impact which fades over the next few years.
In the longer-term, the increase in employers’ national insurance contributions reduces longer term growth by about 0.1ppts, as fewer people are employed, but the increase in government investment will eventually raise productivity. - Second, while raising tax and spending by the same amount is relatively neutral for overall growth, the makeup of growth will be affected. An increase in NICs will eventually feed through to lower wages and working hours, which will dampen consumer spending. What’s more, the big increase in government spending will ‘crowd out’ private sector investment, meaning that the rise in government investment is offset by a fall in business investment.
- Third, a sugar rush of extra government spending combined with extra labour costs for firms means inflation will be higher. The OBR estimates that the policy measures will add about 0.5ppts on to inflation next year. This comes partly from the increase in the national minimum wage and other policies raising employment costs, which firms will likely pass on, and partly because the upfront government spending will boost demand by more than supply.
- Fourth , increased upward pressures on inflation means that interest rates will fall more slowly than they otherwise would have done. The OBR estimates the policy measures will raise interest rates by about 25bps. That means interest rates will probably now only be cut quarterly, leaving them at around 3.75% by the end of next year. Indeed, the chances of a December rate cut have halved since the budget.
Conclusion
Overall, Autumn Budget 2024 still has the deficit falling in the coming years but more slowly than in the plans the Chancellor inherited. That means the budget is expansionary, which will support growth but raise inflation and keep interest rates higher than otherwise.
Depressingly, the OBR suggests that because of higher inflation, interest rates and ‘crowding out’, the budget will make little difference to the size of the economy at the end of the decade. Over the longer term, though, it should lift supply by about 1.5%.
The risk is that with only a wafer-thin headroom of £9.9bn against the fiscal rule, it wouldn’t take much of a deterioration in economic conditions for another round of tax rises to be needed.
Keep updated on the latest developments in the UK's economy, with Tom's weekly Economic Voice.
Business tax
Stability and predictability
Overall, this was a relatively quiet budget for business tax measures. For the majority of businesses the impact of any corporate tax measures will be overshadowed by the cost of increases in employers’ national insurance contributions, coupled with increases in national minimum wage.
There was little to signpost significant reform to direct taxes in the weeks leading up to the Chancellor’s speech. Some were braced for surprises, but in the end none arrived. Instead, this budget was clearly intended to be painstakingly consistent with the new government’s aim to oversee a stable and predictable tax system. The question is whether this will be enough, without further incentives, to encourage increased productivity and deliver growth.
The Corporate Tax Roadmap
A Corporate Tax Roadmap, setting out the direction of travel for business tax measures over the next five years, had been promised. Prioritising stability, predictability and certainty is borne out in a document that uses words like ‘maintaining’, ‘preserving’ and ‘continuing’ far more often than ‘introducing’, ‘removing’ or even ‘reforming’.
As those who had studied its manifesto will have expected, the government has promised no major changes to corporation tax rates, capital allowances for business investment, and research and development (R&D) tax relief. That means, notably, that full expensing for capital expenditure on plant and machinery will be retained. Leasing businesses will be pleased that the intention for them to benefit from the relief is still on the table, though there will be frustration that the Chancellor is being as vague as her predecessor on the timeframe for any changes “when fiscal conditions allow”.
Less widely anticipated, but equally welcome, is the commitment to maintain the current system of corporation tax exemptions for income and gains from shares. The government also confirmed its support for the existing patent box and intangible fixed asset regimes for corporation tax.
For multinational businesses some changes may be on the way, but the most significant of these, the Pillar 1 and Pillar 2 changes dictated by international agreements, are largely the result of consultation and were pre-announced ahead of the budget. Reaffirmation that the UK intends to implement the measures it has helped to develop with its OECD peers will come as no surprise.
The new policy developments announced in the roadmap are far from game-changing for most businesses and broadly comprise the following.
- Consultation on the capital allowances treatment of preliminary costs of major projects.
- Consultation to review the effectiveness of the enhanced tax relief for the remediation of contaminated or derelict land.
- Consultations on reducing the company size thresholds for applying the transfer pricing legislation and requiring information about cross-border connected party transactions to be reported to HMRC. Technical changes to related international corporate tax legislation will also be considered.
- Further development of measures to provide advance certainty of the tax treatment of major investment and certain R&D projects.
Administrative changes
The budget ‘red book’ set out three strategic priorities for HMRC: “closing the tax gap, modernisation and reform, and improving customer service.” An eye-catching feature of the attempt to close the tax gap is the commitment to increase the number of compliance and debt management officers employed by HMRC. Larger businesses will be interested to see if this results in additional customer compliance managers to provide a regular point of contact with HMRC, which most would welcome.
Alongside increasing the resources deployed to target the tax gap, the Chancellor also announced an increase in the rate of interest payable on late payments of tax by 1.5% to a total of the Bank of England base rate plus 4%. Intended to incentivise taxpayers to pay on time, this could have a particular impact on companies that pay their corporation tax liability by quarterly instalment payments. To avoid the higher interest charges, more accurate forecasts of the overall tax liability may be needed at an earlier stage. It will be helpful if the detailed measures take into account the uncertainties larger businesses face in estimating their tax bill.
The roadmap promises to put modernisation of tax administration back on the agenda, with a consultation in the spring of 2025. Clearly, the tax system must keep pace with changes in the way business works. However, technological change in tax is often accompanied by administrative pain and additional cost for business, so hopefully any changes in the compliance burden will be proportionate.
Business rates
Retail, hospitality and leisure businesses operating in England will be interested in the government’s proposal to introduce permanently lower business rates multipliers, funded by higher rates for the most valuable properties. Changes are proposed to take effect from 2026-27, but certain reliefs will apply in the interim. The government is also inviting feedback from stakeholders on wider reforms to create a fairer business rates system. On their own merits, these changes would doubtless be considered good news, but they will provide small comfort to consumer-facing businesses that will be severely hit by the changes to employer’s national insurance contributions and the increase in the national minimum wage.
From an energy and green tax perspective, there were also no surprises. Sheena McGuinness, head of renewables and cleantech at 91探花, comments: “There were only a few new announcements in the Chancellor’s Autumn Budget, with the missing details more notable than what was included. The retention of the freeze on fuel duty was a surprise, as it “would be the wrong choice” to increase it while the cost of living remains high, meaning there will be no higher taxes at the petrol pumps to increase business costs.”
Employment tax
Increased labour costs – Part I (Employer NIC)
Many of the headlines before the budget focused on the increasing costs of employment. Working people may not be directly impacted by tax rises, but their employers certainly are.
The Chancellor’s increase in the rate of employers’ national insurance contributions (NICs), with effect from April 2025, from 13.8% to 15% results in a rate marginally lower than that resulting from the Conservative government’s short-lived health and social care levy, which increased the rate to 15.05%, but combined with the reduction in the threshold above which employers’ NICs becomes due, the impact for many employers will be significant.
Currently, an employer pays NICs at 13.8% on an employee’s annual earnings in excess of £9,100 (and on non-cash benefits such as private medical insurance and company cars). This threshold will drop to £5,000 from April 2025 – at a stroke, £4,100 of earnings previously free of NIC become subject to a 15% charge, borne in full by the employer. For an employee earning the UK average wage of £36,000, the additional cost to the employer of the NIC changes is approximately £940, two-thirds of which is driven by the reduction in the threshold.
Whilst employers will be entitled to tax relief on this additional employment cost (at 25% for companies and the marginal rate of income tax for individuals), this undoubtedly represents a large increase in employment costs.
On a more positive note, the employment allowance is also changing. Currently an employer with a total NICs liability of under £100,000 can benefit from a £5,000 discount. That discount is increasing to £10,500 in April 2025, and the £100,000 threshold is being removed, so more employers will be able to benefit.
It may also be a good time to revisit pension salary sacrifice as an option to mitigate the NIC increase, as the rumoured introduction of employer NICs charge on pension contributions did not materialise in the budget.
Increased labour costs – Part II (higher national minimum wage)
The budget confirmed the announcement earlier in the week that the national minimum (and living) wage (NMW) rates payable from April 2025 will increase. This is part of the new government’s move towards a single adult NMW rate, doing away with differences based on the worker’s age.
The minimum rate for over 21s (officially referred to as the national living wage), will rise by 6.7%, from £11.44 to £12.21 an hour. This equates to an annual pay rise for a full-time worker (37.5 hours a week) of over £1,500.
For those aged 18 to 20, minimum wage jumps from £8.60 to £10 an hour, a 16.3% increase. The annual wage increase for this population of workers would be more dramatic, but many in this age group do not work full-time. It is also worth noting that employers are not charged NIC on wages paid to under-21s (up to £50,270 a year), so the increase in the employer NIC rate should not have an impact for this population.
Apprentice rates rise from £6.40 to £7.55 an hour, an annual pay rise of over £2,200 for 37.5 hours per week.
There will inevitably be challenges for certain sectors which have large populations of lower-paid workers, such as childcare, retail, leisure and hospitality, particularly when employers factor in the potential increased costs of complying with broader government initiatives aimed at ensuring fair pay eg enforcement of holiday pay regulations.
Compliance clampdowns
As part of efforts to ’close the tax gap’, an extra 5,000 compliance staff will be recruited into HMRC, no surprise considering the increase in HMRC activity that has been noted in recent weeks.
HMRC’s blueprint for compliance success is evidenced by the investment in National Minimum Wage enforcement teams and the impact these compliance officers have had on increasing compliance in this area. Should this blueprint be followed by the extra 5,000 compliance staff, we can expect to see more targeted efforts on geographical regions, cities and towns as well as industry specific campaigns. It has taken some time for HMRC to implement and hone its compliance strategies and with better trained, more assured and confident compliance officers, businesses should be prepared to present and demonstrate their compliance controls and processes when HMRC’s ‘Notification of Compliance Review’ letter lands in their inbox.
Our webinar focuses on managing these compliance issues.
Umbrella companies were specifically referenced in the Chancellor’s speech and expanded upon in a policy paper published shortly after. After successive administrations expressed their unease with this sector of the labour market, the new government has taken the bold step of proposing legislation which shifts the obligation to account for PAYE on temporary workers away from umbrella companies and on to agencies or potentially the end users of these workers’ services.
An umbrella company currently stands as the legal employer of such workers and is obliged to account for PAYE and NIC on their earnings, along with offering employment-type benefits eg workplace pensions. However, these new proposals set out a different path, stating plainly that “umbrella companies will no longer be legally responsible for operating PAYE on payments to the workers that they employ.”
Businesses which use umbrella company employees are advised to keep a close eye on developments in this area to understand how their obligations may change and what additional costs may arise.
Saxon Moseley, partner and head of leisure and hospitality at 91探花 commented: “The retail and hospitality sectors are set to be disproportionately affected by the rise in the national minimum wage and higher employers’ national insurance contributions. Alongside the impact of the Employment Rights Act, many high street operators will find themselves on a financial cliff edge.”
VAT & indirect taxes
The centre piece of Rachel Reeve’s first budget was undoubtedly the reconfirmation of the introduction of VAT on private school fees.
Elsewhere, the betting and gaming industry will have breathed a sigh of relief that gambling duties were left unchanged, proving that one shouldn’t believe everything that is published in the newspapers in the lead-up to a budget.
Also defying several pre-budget predictions, a freeze on fuel duty ensured, in the short term at least, that there will be no higher taxes at the petrol pumps.
Perhaps the most interesting budget announcement though, is the consultation in early 2025 on the adoption of e-invoicing in the UK. Already adopted by several EU member states, e-invoicing is a first step in the direction of real time reporting of invoice data and the changes, once fully adopted, will fundamentally change the VAT compliance landscape for the majority of UK businesses.
VAT
Private school fees: The Chancellor confirmed that from 1 January 2025 all fees for education services and vocational training provided by private schools in the UK will become subject to VAT at the standard rate of 20%. This will also apply to boarding services provided by private schools.
- To protect 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.
- Diplomatic staff and serving military personnel will be partly protected from the VAT increase with additional funding being provided ahead of the changes to cover the VAT impact on that proportion of fees funded by the Continuity of Education Allowance.
- The definition of a nursery class has been changed to “a class that is composed wholly (or almost wholly) of children who are under compulsory school age or, in Scotland, school age, and would not be expected to attain that age while in that class”. This clarification should ensure that the services provided by standalone nursery schools and nursery classes attached to private schools continue to be exempt from VAT.
- A connected persons test has also been introduced as an anti-avoidance measure to prevent schools from contracting their services out to connected eligible bodies in order for the education and boarding services they provide to remain exempt from VAT.
Many private schools will be disappointed that their concerns surrounding the lack of time available to address these significant VAT changes have been ignored.
VAT treatment of private hire vehicles: The government is considering the responses to the recent consultation on the VAT treatment of private hire vehicle services, as well as the impact of the recent Court of Appeal judgment in DELTA Merseyside Limited & Anor v Uber Britannia Limited.
E-invoicing: There will be a consultation in early 2025 to establish standards for the adoption of electronic invoicing in the UK.
- The UK introduction of e-invoicing and the real time reporting of invoice data will fundamentally change the VAT compliance landscape for businesses.
Other indirect taxes
UK carbon border adjustment mechanism (CBAM): Following consultation, the government has announced the introduction of a new environmental levy with effect from 1 January 2027.
- CBAM will place a carbon price on goods imported to the UK from the aluminium, cement, fertiliser, hydrogen, iron and steel sectors that are deemed to be at risk of carbon leakage.
- Products from the glass and ceramics sectors will not be in scope of the UK CBAM from 2027.
- The registration threshold for CBAM will be set at £50,000 of relevant goods over a rolling 12-month period, retaining over 99% of imported emissions within the scope of the CBAM, while removing over 80% of otherwise registrable businesses.
- Over 70% of those removed from the CBAM by this threshold are micro, small, or medium sized businesses.
Air passenger duty rates for 2025 to 2026: The air passenger duty (APD) reduced rates for economy passengers will increase in line with the forecast retail price index (RPI), rounded to the nearest pound, for 2025 to 2026.
- Domestic and international short-haul economy rates will remain frozen.
- The standard and higher rates will be further increased to help account for recent high inflation.
Air passenger duty rates for 2026 to 2027: All rates are to be increased by 13%, rounded to the nearest pound, to account in part for previous high inflation and to help maintain the value of APD rates in real terms.
- The higher rates that apply to larger private jets will increase by a further 50%.
- The new rates will apply from 1 April 2026.
- For the tax year 2027 to 2028 and in subsequent years, APD rates will be rounded to the nearest penny.
- A consultation on extending the scope of the higher rates to all private jets has also been published.
Plastic packaging tax: The rate of plastic packaging tax (PPT) will be increased in line with the consumer price index (CPI) from 1 April 2025.
- Following the publication of its summary of responses to the PPT mass balance approach (MBA) consultation, the government will allow businesses to use an MBA to attribute chemically recycled plastic to packaging for the purposes of the PPT calculation.
- The government will undertake further technical engagement before confirming when the change will take effect and publish draft legislation for consultation.
- The government also confirmed that pre-consumer waste will no longer be allowed to be treated as recycled plastic for the purpose of PPT. This change will take effect from the same date the MBA is introduced.
Landfill tax: The standard and lower rates of landfill tax will increase in line with RPI, adjusted to account for high inflation between 2022 and 2024, rounded up to the nearest five pence. This increase will take effect from 1 April 2025.
Landfill communities fund value: The value of the landfill communities fund for the 2025 tax year is to be set at £23.6 million. The cap on credits claimed by landfill operators in respect of contributions will remain at 5.3% of their landfill tax liability.
Aggregates levy: The rate of aggregates levy will increase in line with RPI from 1 April 2025.
Climate change levy: The main rates of climate change levy (CCL) on electricity, gas, and solid fuels will increase in line with RPI from 1 April 2026.
- The main rate for liquefied petroleum gas will remain frozen.
- The reduced rates of CCL will remain at an unchanged fixed percentage of the main rates. This means that the liability for those eligible for the reduced rates will increase proportionately.
Customs & Excise
Fuel duty rates: The 5p cut to fuel duty rates first introduced in the 2022 Spring Statement is to be extended by 12 months and will now expire on 22 March 2026.
Tobacco duty rate: Tobacco duty rates will increase for all tobacco products by the tobacco duty escalator of 2% above inflation (based on RPI).
- Hand-rolling tobacco is to rise by an additional 10% above the escalator to 12% above RPI.
- All of these changes took effect from 6pm on 30 October 2024.
Gaming duty — gross gaming yield bands: The gross gaming yield bandings used to determine the rate of gaming duty will be frozen from 1 April 2025.
Gambling duty reform: In 2025 the government will publish a consultation on proposals to bring remote gambling (gambling offered over the internet, telephone, TV and radio) into a single tax, rather than taxing it through the present three tax structure.
Vaping products duty: The government will introduce a vaping products duty (VPD) at a single duty rate of £2.20 per 10ml of vaping liquid. This will take effect from 1 October 2026, with businesses manufacturing or importing vaping products able to apply for approval from 1 April 2026.
An equivalent one-off increase in tobacco duties of £2.20 per 100 cigarettes or 50 grams of tobacco will also take effect from 1 October 2026.
Soft drinks industry levy (SDIL) uprating: Both the lower and higher rates of the soft drinks industry levy will increase annually over the next five years to reflect the 27% CPI increase since 2018 and to account for the CPI increase each year from 1 April 2025. The rate will be adjusted to apply per 10 litres of soft drink.
The annual increase will be the total of a 27% increase spread equally over the five-year period from 2025 to 2029 (equating to a 10 and 13 pence per 10 litres increase, per year to the lower and higher rates respectively) and, starting from April 2025, CPI inflation over the previous year.
Tariff suspensions extended until June 2026: Individual businesses may apply for tariff suspensions to remove tariffs on specific goods on a time limited basis. This provides businesses with more certainty as they may rely upon on existing tariff suspensions for a longer period than is normal.
Five new designated customs sites in existing freeports: This new measure will allow specific customs activities without individual customs authorisations. The proposal is for five designated customs areas only which may mean that three of the existing eight Freezones do not have this provision extended to them.
New trade strategy: A new trade strategy is to be published in 2025 to develop free trade agreement opportunities. This strategy includes a pledge to work with the European Union to foster strategic co-operation.
Alcohol duties
Alcohol duty rates: Duty on draught products below 8.5% alcohol by volume (ABV) will be cut by 1.7%. This will reduce duty by 1p on the average ABV strength pint.
The small producers' discount for non-draught products is to be increased and the cash discount provided to small producers for draught products is to be maintained, thereby increasing the relative value of the small producer relief.
Alcohol duty rates on non-draught products will increase in line with RPI. The simplified rates for travellers’ allowances have been amended in line with these increases.
The current temporary wine easement will end on 1 February 2025.
All these changes are to take effect from 1 February 2025.
Alcohol duty stamps scheme: The government has confirmed the discontinuation of the alcohol duty stamps scheme from 1 May 2025. The removal of this scheme will reduce costs and the administrative burden on businesses that place alcoholic spirits on to the UK market.
Property tax
Stamp duty land tax (SDLT)
With effect from 31 October 2024, the higher rate for additional dwellings (HRAD) supplement for SDLT will increase from 3% to 5%.
This change affects buyers of second homes and buy-to-let properties in England and Northern Ireland. HRAD is an additional charge on top of the standard residential property SDLT rates, aimed at making housing more accessible for families and first-time buyers.
The increase represents a significant rise that will impact the affordability and attractiveness of residential investment properties and second homes. The change is part of broader efforts to address housing market imbalances between landlords and those wishing to get on the property ladder.
The rate of SDLT payable by companies buying residential property worth more than £500,000 will also rise from 15% to 17%. This will impact landlords wishing to incorporate their property portfolios to benefit from a more favourable rate of tax on corporate profits as well as full mortgage interest deductibility.
Individual landlords may now consider that the cost of incorporation is simply too high due to this increase in the SDLT rate. Given restrictions on tax relief on mortgage interest and increased compliance obligations, many landlords may even be considering whether running a buy-to-let business is worthwhile at all.
The temporary extension to the nil rate band of SDLT to £250,000 for non first-time buyers is due to end on 31 March 2025, after which it will reduce to £125,000. This change will likely have a further impact on landlords’ appetite for residential property investment.
However, this rate change should not impact investors who acquire six or more residential properties in one transaction. These investors will continue to be able to benefit from the lower non-residential SDLT rates.
Finally, it is interesting to note transactions which exchanged prior to 31 October 2024 will not be affected by this rate increase so any last minute budget day transactions may still be 'safe'.
Private client tax
Capital gains tax (CGT)
As widely anticipated, CGT rates on the disposal of chargeable assets, such as shares, are rising and will now be in line with the residential property rates, with the lower rate increasing from 10% to 18% and the higher rate from 20% to 24%.
Whilst these increases were not as high as some had feared, more surprising was that the new rates came into immediate effect from 30 October 2024; disappointing for those that had hoped that any change would be delayed until the start of the new tax year.
The amount of lifetime gains eligible for business asset disposal relief (BADR) was not reduced as many had expected and remains at £1m. However, the rate of CGT payable on them is to increase from its current rate of 10% to 14% from 6 April 2025 and to 18% from 6 April 2026. Unlike the mainstream CGT rate changes, the BADR rate changes have been deferred until the new tax year, meaning there’s a potential £140,000 benefit on qualifying disposals in the period to 5 April 2025. Thereafter the maximum benefit drops to £100,000 and to £60,000 from 6 April 2026.
There were also changes to investors’ relief (IR) that reduce the lifetime gains limit from £10m to £1m from 30 October 2024 but continue to align the applicable CGT rates with those for BADR. IR applies to gains on qualifying shares in unlisted trading companies and is aimed at investors, such as business angels, who have no active involvement in the company.
In both cases, the increase in CGT will affect the overall profitability of business asset sales, making some deals less attractive.
For private equity and venture capital, there were also changes to the capital gains tax rate which applies to carried interest.
Inheritance tax (IHT)
The IHT nil rate band (£325,000) and residence nil rate band (up to £175,000) remain frozen until 2030, the rates of tax remain unchanged, and the rumoured concept of a gift tax was not mentioned.
Changes were introduced to business relief and agricultural relief. Currently, businesses and farms, including shares in unquoted trading companies, trading partnerships and agricultural businesses meeting certain conditions can qualify for 100% relief from IHT. The aim of these reliefs is to ensure the survival of family-owned businesses and farms following the death of the owner, without the need to sell the assets to pay the IHT liability.
With effect from 6 April 2026, these reliefs will be reduced significantly with the 100% relief limited to the first £1m of combined value of agricultural and business property. Above that limit, relief will be restricted to 50% giving an effective tax rate of 20%.
This £1m allowance will cover the value of an estate at death, failed lifetime gifts (due to the death of the donor within seven years) and chargeable lifetime transfers; eg transfers into trust.
Assets currently qualifying for the lower 50% relief, for example personally owned assets used in the business, will continue to qualify for relief at 50%.
On a more positive note, the government has confirmed that the scope of agricultural property will be extended to include land managed under environmental schemes from 6 April 2025.
Also, from 6 April 2026, shares held in a business quoted on the Alternative Investment Market (AIM) will not be eligible for the £1m allowance and will only qualify for relief at 50%.
Trusts
Trusts did not escape the Chancellor’s attention and there is to be a consultation in early 2025 to consider lifetime transfers into trust and IHT charges on trust property, particularly in relation to the application of the new restricted business and agricultural relief allowances.
More immediately, it was confirmed that the £1m business and agricultural relief allowance will be available for trustees on 10 year anniversary or exit charges on the value of qualifying property. Where a settlor has created multiple trusts before 30 October 2024, they will each be entitled to the £1m allowance. Trusts set up on or after 30 October 2024 by the same settlor will share the single £1m allowance.
How the allowance will work on a 10 year or exit charge will be part of the consultation, but there is already concern about how trustees will pay the IHT liability if there is no cash within the trust.
Pensions
With effect from 6 April 2027, most unused pension funds and death benefits will come within an individual’s estate for IHT purposes, in a move likely to prove very unpopular. Reporting and payment of any IHT due will be the responsibility of the pension scheme administrators. How this is to be implemented is again subject to consultation.
It remains to be seen whether the withdrawal of the IHT exemption from pension funds will discourage individuals from pension saving.
Non-dom tax regime
As expected, domicile will be abolished as a UK tax concept from 6 April 2025. The budget announcements have, however, confirmed some relatively generous transitional provisions affecting existing offshore trusts and individuals.
Individuals: All current non-UK domiciled individuals (non-doms) will become taxable on their worldwide income and gains unless they meet the requirements of the new foreign income and gains (FIG) regime from 6 April 2025. There will be transitional rules governing previously untaxed FIG, and rebasing for capital assets held on 6 April 2017.
Most importantly, affected individuals will be able to make an election to apply a special tax rate, initially 12%, on unremitted FIG allowing the FIG to remain offshore. If no election is made, the FIG will be taxable when it is brought into the UK at the individual’s marginal UK tax rate. New arrivals to the UK will not be taxed at all on FIG for the first four years of UK residence if they have been non-resident for at least the previous 10 years.
Regardless of domicile, all individuals will be subject to UK IHT if they have been UK tax resident for at least 10 of the previous 20 tax years (ie “long-term resident”).
Offshore trusts: If the settlor of an offshore trust is a long-term UK resident and retains a benefit in that trust, the trust’s income will be taxable on them personally from 6 April 2025. In most cases gains will be taxable on the settlor even if the individual is excluded from benefit.
Foreign property held in trusts created by those with non-dom status before 30 October 2024 will not be subject to IHT on the death of the settlor. However, all trust assets will be subject to periodic IHT charges once the settlor is a long-term UK resident.
The IHT status of trusts created on or after 30 October 2024 will follow that of the settlor. This means that if the settlor becomes a long-term UK resident, all assets in the trust are subject to IHT.
For more detail on the updates to the non-dom regime, watch our webinar - .
Cut to the chase: Budget special
