Autumn Budget 2024: Personal Taxes

The Chancellor has announced that there will be an immediate increase to the rates of capital gains tax (CGT) with the basic rate rising to 18% and the higher rate to 24%.  

There will also be a staggered increase to the CGT rates for business asset disposal relief (BADR) and investors’ relief (IR), with effect from 6 April 2025.

Summary

The main rates of CGT have been increased for all disposals made on or after 30 October 2024. The tax rates will increase from 10% to 18% at the basic rate and from 20% to 24% at the higher rate. CGT rates applying to disposals of residential property will remain unchanged and are now aligned with the main rates of CGT.  

No changes have been made to the annual exempt amount and taxpayers will still be able to claim relief for capital losses and choose to offset these against capital gains in the most tax efficient way.  

BADR and IR have also been amended. The rate of CGT on disposals of assets eligible for BADR or IR will increase from 10% to 14% from 6 April 2025, with a further increase to 18% from 6 April 2026.  

The lifetime limit for IR has been reduced from £10 million to £1 million for disposals made on or after 30 October 2024. The lifetime limit for BADR remains unchanged at £1 million.

Our comment

An increase to the rate of CGT was widely expected, however there was little consensus as to what the exact rate would be or from when the changes would take effect. With the immediate changes to tax rates, 2024/25 will be a tax year of multiple CGT rates.  

The increase in rates to 18% and 24% aligns the main rates of CGT with the rates for residential property disposals, which should reduce one element of complexity in the system for taxpayers.  

Taxpayers should look to ensure that any available losses are utilised in the most tax efficient manner.  

The Autumn Budget brought significant announcements in relation to inheritance tax (IHT) for landowners and business owners. While the existing nil-rate band and residential nil-rate band will remain unchanged, important reliefs for business property and agricultural property will be restricted from 6 April 2026. The inheritance of unused pension funds at death will also be brought within the scope of IHT.

Summary

IHT rate bands

IHT is a capital tax paid on the value of an estate on death and on certain chargeable lifetime gifts. The current rate of IHT is 40%.

An estate valued up to the nil-rate band (NRB) of £325,000 can be inherited without IHT. Any unused NRB of an individual can also be passed to their surviving spouse or civil partner. A further residential nil-rate band (RNRB) of up to £175,000 is available to reduce the value of an estate if a family home is left to direct descendants. Like the NRB, an amount of up to 100% of the unused RNRB can be passed on to a surviving spouse. A potential combined NRB and RNRB of up to £1m may therefore be available for a married couple whose joint estate is worth £2 million or less.

The Chancellor announced that the current NRB and RNRB will not change and has also frozen them at current thresholds for a further two years until 5 April 2030.

Business and agricultural property relief

Current rules allow relief from IHT for the value of trading business assets or agricultural land and property gifted during lifetime or held at the time of death. Broadly speaking, 100% business property relief (BPR) is available for a trading business, or an interest in a business, and unlisted shares in a trading company.

A 50% relief applies to some other forms of business assets, such as assets used by a trading business.

100% agricultural property relief (APR) is available for land or pasture used to grow crops or rear farm animals as well as associated property such as farmhouses and cottages. Relief can be restricted to 50% depending on the asset and tenancy arrangements.

Qualifying Alternative Investment Market (AIM) shares have historically qualified for 100% BPR, when held for more than 2 years.

Changes introduced

From 6 April 2026, the availability of BPR and APR at 100% will be limited to a total allowance of £1 million. The balance of qualifying assets will be eligible for relief at 50%. The rate of 50% applying to certain business and agricultural property will remain unchanged.

This new allowance will apply to the combined value of business property or agricultural property and will cover transfers during lifetime and the value of property in a death estate.

For example, the allowance could be divided across £750,000 of property qualifying for BPR and £250,000 of property qualifying for APR.

If the total value of the qualifying property to which 100% relief applies is more than £1 million, the allowance will be applied proportionately across the qualifying property. For example, if there was agricultural property of £6 million and business property of £4 million, the allowances for the agricultural property and the business property will be £600,000 and £400,000 respectively.

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

AIM shares will qualify for relief at 50%.

Anti-forestalling measures will be introduced in relation to lifetime transfers made on or after 30 October 2024 where the transferor passes away on or after 6 April 2026, meaning the £1 million limit could apply to those gifts.

The £1 million allowance also applies to trusts. Trustees of most trusts are liable to an IHT charge of up to 6% every ten years on the value of property held in a trust. There is also an exit charge when property leaves the trust. The £1 million allowance will apply to the combined value of property qualifying for BPR and APR within the trust, on each ten-year anniversary charge and exit charge. A consultation is expected in early 2025 covering the detailed application of these changes for property held in trust.

Settlors may have set up more than one trust comprising qualifying business or agricultural property before 30 October 2024, each trust would have a £1 million allowance for 100% relief from April 2026. 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.

Another update to IHT is that the Government will introduce legislation to extend the existing scope of APR from 6 April 2025 to land managed under an environmental agreement with, or on behalf of, the UK Government, devolved governments, public bodies, local authorities or approved responsible bodies.

Inherited pensions

Currently, the value of most pensions is outside the scope of IHT. From April 2027, the Government will bring unused pension funds and death benefits payable from a pension into an estate for IHT purposes.

Our comment

While changes to BPR and APR were anticipated, the precise form of any changes was uncertain and did not feature in the Labour manifesto. Amid concerns that the relief could be removed entirely, it is welcome to see commitment to maintaining the relief in some form.

These changes will have a significant impact for the owners of private businesses and agricultural assets, as well as their families. Careful thought will now need to be given to how these businesses can be continued by the next generation, as well as how families will be able to meet the IHT liabilities they are now exposed to.

As an example, the estate of a qualifying trading business owner with unlisted shares valued at £11m would now have a potential exposure to IHT of £2m, potentially without other liquid assets to pay it. This could call the long-term viability of some succession plans into question, particularly if family members are faced with a decision of selling the business to settle an IHT liability.

Understanding your IHT exposure is therefore crucial, particularly if your estate includes high value business assets, agricultural land or an inherited pension fund.

What may have previously been exempt or covered by 100% relief, may now be chargeable and be exposed to IHT at 40%.

The Government has announced two measures to help savers. ‘Pension superfunds’ are intended to reduce costs and increase returns, and pension ‘pots for life’ to reduce the administrative burden of having many small pensions. In addition, the triple lock is being maintained.

Summary

The Government has reiterated its commitment to these measures, which have been trailed previously.

Pension superfunds are intended to ensure that contract based defined contribution pension schemes are competitive and offer savers value for money. Larger, consolidated pension funds could reduce costs and improve investment returns.

In parallel, the ‘pot for life’ initiative would allow employees to ask their employer to pay contributions into the pension plan of their choice, reducing the incidence of individuals with several small pensions. This is designed to reduce pension charges and increase pension investment options.

The maintained triple lock means that pensioners are likely to see their payments increase by 8.5% from Monday 8 April 2024. The new State Pension will therefore increase from £203.85 a week to £221.20 a week.

Our comment

These are all welcome changes. The introduction of pension superfunds will reduce scheme operational costs, which should increase value for money for many savers, and the ongoing commitment to the triple lock will allow many pensioners to meet the seemingly ever increasing costs of living.

The pots for life could be beneficial for employees, however the potential administration burden on employers would be considerable and care will need to be taken to protect savers from scams. These are easier to impose on private rather than company pension schemes.

Carried interest, a share in the profits of a private equity fund's investment, is currently taxed at 18% or 28%. The Government plans to change this, viewing the current regime as too generous. From 6 April 2025, the capital gains tax rate on carried interest will rise to 32%. From 6 April 2026, all carried interest will be treated as trading profits and subject to income tax as well as national insurance, with a 72.5% multiplier reducing the effective tax rate for ‘qualifying’ receipts. The new regime will build on existing rules and will apply to both employed and self-employed fund managers. 

Summary

Carried interest is a share in the profits of an investment made by a private equity fund, granted to fund managers, and is contingent on the performance of that investment. Due to its unique nature, carried interest has its own tax regime, which currently sees these distributions taxed at a rate of 18% or 28%. The Government considered this regime too generous and promised to bring in a new tax regime to close a perceived 'loophole'.

What is changing?

Changes will be introduced in two phases:

• From 6 April 2025, the existing regime will remain but the rate of capital gains tax that applies will increase to 32%
• From 6 April 2026, all carried interest will be treated as trading profit and subject to income tax and national insurance contributions. A 72.5% multiplier will apply to reduce the rate of tax for ‘qualifying’ carried interest receipts

The new regime will build on top of existing rules and definitions for carried interest. It will not displace the existing disguised investment management fee (DIMF) and income based carried interest (IBCI) rules.

The existing regime will continue to apply until 5 April 2026 to allow time for consultation on the new regime, enabling the definition of qualifying carried interest to be refined.

New regime

IBCI rules already apply to subject specific carried interest receipts to income tax and national insurance. This is the case where the average holding period of the investments, to which the carried interest relates, is less than 36 months, with a blended approach for holdings of 36-40 months.

The new regime will build on this regime and treat any carried interest that is subject to IBCI rules as trading income.

For ‘qualifying investments’, those not caught by the IBCI rules will then see the effective tax rate paid on carried interest reduced by a ‘multiplier’ mechanism.

It is intended that this will reduce the amount of carried interest subject to taxation by 72.5%. For an additional rate taxpayer, this would effectively reduce the rate of tax and national insurance to 34%.

Modification to IBCI rules

The Government plans to modify the IBCI rules, to remove an exemption for carried interest received in connection with employment and subject to employment-related securities (ERS) rules. This will broaden the scope of the rules to catch both employed and self-employed fund managers in future.

A consultation document has also been issued to seek views on further modification to these rules to broaden their application to two suggested areas:

• Requiring a minimum threshold for capital invested by fund managers and;
• Requiring a minimum period of time between the award of carried interest and its receipt

The consultation period will run until 31 January 2025 and it is not expected that further detail will be available before early Spring 2025.  

Territorial scope of carried interest

It will continue to be possible for individuals to limit the amount of carried interest that is subject to UK taxation where the investment management services leading to the carried interest were performed outside the UK. This will only apply for individuals qualifying for the new four-year foreign income and gains regime.

However, the reclassification of carried interest as trading income will create a new liability to taxation for non-UK resident individuals who receive carried interest arising in respect of duties performed within the UK.

Our comment

Private equity is a significant part of the UK economy, serving both as a source of investment for UK businesses and as a key industry within the UK’s financial services sector. Currently, London ranks second only to New York as the world’s leading private equity hub.

Senior executives are now more mobile and flexible than ever. There was concern that any overreach by the Chancellor could prompt these executives, who pay large amounts of tax at the highest tax rates, to relocate to more favourable jurisdictions. This could diminish the sector and reduce long-term capital funding for UK businesses.

Our pre-Budget wishes were for the Chancellor to balance the need for increased tax rates with maintaining the UK’s competitiveness relative to other major economies, as well as to ensure simplicity and consistency in the application of the rules.

While overall tax rates are increasing, it is at least a small consolation that they have not risen significantly relative to the main rate of capital gains tax, now at 24%. It is also helpful that the new regime will build on existing definitions and rules, with a period of consultation on modifications to the definition of qualifying carried interest. However, it is disappointing that there will be no transitional provision for existing carried interest entitlements that are yet to be received.

It also remains to be seen whether these changes, coupled with stricter tax rules and more onerous reporting requirements for individuals moving to the UK, will severely limit the UK’s attractiveness as a hub for private equity.

The Chancellor has announced that the current remittance basis regime for non-UK domiciled individuals will be replaced with a residence-based regime from 6 April 2025.

Summary

Under current law, a non-UK domiciled individual (broadly someone originating from outside the UK, who does not intend to remain in the UK permanently), is able to elect to be taxed in the UK on the ‘remittance basis’, until they have been resident in the UK for 15 of the past 20 tax years. Under the remittance basis, an individual is subject to UK tax only on UK-source income and gains, and on any non-UK income and gains that are used in the UK. The Government plan to remove this regime and replace it with one based on tax residence.

The new regime will mean that individuals will not pay tax on foreign income and gains for the first four years after becoming UK tax resident. The regime is aimed at those coming to the UK either for the first time or after an absence of over 10 years, rather than being based on domicile status. Taxpayers who choose to use the regime will not be entitled to an income tax personal allowance or capital gains tax annual exemption for the relevant tax year.

Transitional arrangements will be made available to existing non-UK domiciled individuals after 6 April 2025. These will include:

- an option to rebase the value of capital assets to their value on 5 April 2019. This will be available for individuals who are currently non-UK domiciled and not deemed-UK domiciled under existing rules, who have claimed the remittance basis;
- a temporary 50% exemption on the taxation of foreign income in 2025/26, for individuals who will ‘lose’ access to the remittance basis on 6 April 2025; and
- a two-year ‘temporary repatriation facility’, which will allow individuals to remit existing pre-6 April 2025 foreign income and gains into the UK and pay a reduced 12% tax rate.

From 6 April 2025, the protection from tax on income and gains arising within settlor interested trusts will no longer be available and the foreign income and gains will be taxable on the settlor. The Government will also review provisions to prevent income tax avoidance by transferring income producing assets to a non-UK resident company. The existing rules will be revised to ensure that they remain effective and complement the new residence regime.

Overseas workday relief rules will also be revised. Under existing rules, inbound non-UK domiciled employees can benefit from an income tax exemption on income from non-UK duties for the first three years of UK residence, subject to that income not being remitted to the UK. The new rules will remove the requirement to keep the income offshore, meaning that the overseas element of the employment income can be brought to the UK without a tax charge.

A residence-based regime will also be introduced for inheritance tax. The Government plan to consult on this and has outlined plans for a 10-year exemption from inheritance tax on non-UK assets for new arrivals and a ‘tail-provision’ to keep a taxpayer within the scope of worldwide inheritance tax for ten years after leaving the UK. No changes to inheritance tax will take effect before 6 April 2025. The Government has advised that the current inheritance tax exemptions for non-UK property held in trusts will continue for trusts already in existence, and for trusts settled by a non-UK domiciled settlor before 6 April 2025.

Our comment

The Labour party had already announced plans to repeal the non-UK domicile tax regime if they form a Government after the next general election but, notwithstanding rumours in the press in the days leading up to the Budget, it was quite unexpected that the existing Government would take action now.

The new rules have been framed to attract foreign investment by those newly arriving in the UK. Such individuals will not be taxed on funds that they bring to the UK, whereas existing rules charge tax on remittances of foreign income and gains that arise after an individual becomes UK resident. Longer term UK residents stand to lose out, however, particularly if they anticipated using the remittance basis beyond 5 April 2025 or if they benefit from the existing beneficial regime for offshore trusts.

Individuals becoming taxed on a worldwide basis may need to give greater consideration to international tax treaties.

There is now a window of just over one year, during which time affected taxpayers should take the opportunity to review their tax affairs and plan for how the new tax regime will affect them in the future.

The Government has announced its ‘most ambitious ever package’ to close the tax gap, expected to raise £6.5bn per year by 2030. This includes a five year £1.4bn investment in 5,000 extra tax compliance staff for HMRC and funding for 1,800 tax debt collectors. Late payment interest on tax debt will also increase from April 2025 by 1.5% and there will be a ‘strengthened’ reward scheme for informants who tell HMRC about tax fraud. 

Summary

Amongst a raft of measures to reduce the tax gap is the announcement of a significant investment in extra staff at HMRC to combat non-compliance and non-payment of taxes. 200 of 5,000 compliance staff will start work immediately.

Those who cannot, or will not, pay tax that is due will face a higher rate of interest from April 2025, with a further 1.5% increase to the current rate of 7.5%. 

Tackling PAYE non-compliance by umbrella companies is singled out as a strategic focus.

The Government plans to expand HMRC's counter-fraud capability for high-value cases and introduce changes to its reward scheme for informants who report such cases. There will also be a ‘scaling up’ of investigations related to those evading tax offshore. A consultation on HMRC’s powers to correct tax mistakes was also announced, exploring a suggested new power requiring taxpayers to correct mistakes themselves. 

Our comment

HMRC will no doubt welcome the investment in thousands of extra staff to combat tax non-compliance including non-payment. Taxpayers will hope that this includes extra staff to support those who genuinely cannot pay as well as clamping down on those who choose not to. Taxpayers will not, however, welcome what appears to be an arbitrary increase in the rate of late payment interest from April 2025, which could rise to 9%. 

The amount of tax lost to umbrella company fraud is singled out as a key area of focus for HMRC, although it does not believe its actions will bring in significant extra tax until 2026/27. It remains to be seen whether the large increase in employer national insurance contributions will lead to more non-compliance in this area. 

Many have called for a better, more formal system for rewarding informers who provide HMRC with information on high-value tax fraud and avoidance cases, although there is no detail as yet as to what is planned. A move to a US-style scheme, where rewards linked to recoveries are offered, is likely to encourage more whistleblowers to come forward. 

The stamp duty land tax (SDLT) surcharge for purchasers of second homes and corporate purchasers of residential property, commonly referred to as the higher rate for additional dwellings (HRAD), will be increased from 3% to 5%. 

In addition, the higher rate of SDLT for purchases of high-value property (value exceeding £500,000) by companies, and other corporate vehicles, will increase from 15% to 17%. 

Summary

The HRAD will increase from 3% to 5% for land transactions with an effective date, usually the date of completion, of on or after 31 October 2024. In addition, for land transactions with an effective date of on or after 1 April 2025, the rates and thresholds for residential SDLT will change. The £250,000 threshold will decrease to £125,000, as planned. A rate of 0% will apply on consideration up to £125,000 and a rate of 2% on the consideration that exceeds £125,000 but does not exceed £250,000. The rates and thresholds will remain unaltered above £250,000, and the increased 5% HRAD will be applicable on top of these rates. 

The higher rate of SDLT payable by companies buying high value property worth over £500,000 will be increasing by 2% to 17%. This penal flat rate generally only applies where property is acquired for a non-commercial purpose and relief is available for most developers and investors in property rental businesses.
 
It should be noted that SDLT only applies to purchases of land in England and Northern Ireland, and the increased HRAD rates do not apply to purchases of property in Scotland and Wales, where different, devolved, land transaction tax regimes apply. 

As previously announced in the Spring Budget 2024, there will also be changes to furnished holiday lets (FHL). Currently, FHLs are treated as a business for capital gains tax (CGT), meaning favourable tax reliefs can be claimed such as a lower CGT rate of 10% under current business asset disposal relief rules. Other CGT reliefs, such as rollover relief, can also currently be claimed. For income tax purposes, full relief is currently available for loan interest.

From April 2025, the FHL regime will be abolished and the business will be treated as a normal rental business. This means the standard CGT rates of 18% and 24% on a disposal will apply and only basic rate tax relief for loan interest will be available when calculating taxable profits.

Our comment

The SDLT changes were not as expected but a change of some description was anticipated. This will increase the SDLT bill for many property owners, although, it is worth noting that relief is still available for the purchases of six or more dwellings, which will be applicable in many commercial arrangements. However, this latest change, coupled with the removal of multiple dwellings relief earlier this year, will represent an undesirable increase on land transaction costs especially for smaller investors and developers.

It is also worth observing that there were not any associated substantive changes to the HRAD legislation, other than the increase of rates. This means that cashflow problems will be exacerbated for purchasers who must pay the HRAD on the purchase of a new residence and later reclaim it.

There was no mention of any changes to the first time buyers' (FTB) relief, or the non-UK resident surcharge as had been rumoured beforehand. However, it is expected that the thresholds for FTB relief will reduce back to £300,000 and £500,000 (from £425,000 and £625,000) with effect from 1 April 2025, as announced by the previous Government, although this was not specifically mentioned.

The headline rates for Income Tax remain unchanged for a further tax year. The bands at which tax is payable will also remain frozen until 2028.

Summary

The Chancellor has announced that there will be no change to Income Tax rates for the 2025/26 tax year. The bands at which Income Tax rates are applied will also remain frozen until the 2028/29 tax year, from which point they will be raised in line with inflation. The previous Government had announced freezes until April 2028, so this confirms the freeze won’t be extended further. 

The Scottish and Welsh Governments have some powers to set their own rates of income tax, so commitments to freezing or increasing rates in this Budget only apply fully to English and Northern Irish taxpayers.

Our comments

Taxpayers will be glad that Income Tax rates have not been increased, although this was expected as it was a manifesto pledge from the new Government. Income Tax bands remaining frozen for a further three tax years will, however, lead to an effective increase for many, as tax bands will not increase in line with inflation. 

The Budget has introduced various changes to HMRC’s administrative powers. Reforms have been made in areas including the high income child benefit charge, late payment interest and Making Tax Digital (MTD).

Summary

The Budget has laid out additional measures regarding the administration of the tax system. Key changes include:

• From 6 April 2025, HMRC will review the official rate of interest (ORI), which is principally used to calculate employee benefits on low-interest loans, every quarter and amend it accordingly. Previously the rate has not increased in-year
• The proposed reform to base the high income child benefit charge on household income will not go ahead. From 2025, it will be possible for the charge to be paid through an individual’s PAYE code where they are employed or pre-populated on the Self-Assessment tax return for those using this service
• From 6 April 2025, HMRC will increase the rate of interest charged on late tax payments by 1.5%. This will take the overall interest rate to the Bank of England base rate plus 4%
• MTD will be extended to cover individuals with a combined trade and rental income exceeding £20,000. A specific date for the introduction of this extension has not been given but the Government intends it to occur by the end of this Parliament
• The Government will consult on simplifying how offshore interest is reported, potentially allowing for interest reported on a calendar year basis to be reported as co-terminus with the UK tax year which ends on 5 April
• The Government plans to digitise the inheritance tax (IHT) service from 2027/28. The intention is for the reforms to make it simpler and quicker to file returns and  pay any tax due

Our comment

We support the Government’s intention to look for opportunities to simplify the administrative burden for taxpayers. We welcome the policy approaches concerning the reporting of foreign interest and the digitisation of the inheritance tax service. The opportunity to pay the high income child benefit charge through the PAYE code should also reduce inadvertent under-reporting of the charge. Conversely, the potential of four official interest rates each year adds a layer of additional administrative burden for taxpayers.

Taxpayers will need to be mindful of the proposed change to the rate of late payment interest, which can now result in significant charges on late payments of tax. In particular, where individuals or trustees have opted for the instalment option to pay IHT, they may wish to review the financial impact of the increased interest charges when compared to settling the inheritance tax outright.

Investors’ relief qualifying disposals made on or after 30 October 2024 are subject to a reduced lifetime limit of £1m (from £10m) but retain their 10% tax rate. This rate will increase to 14% from 6 April 2025 and to 18% from 6 April 2026 to align it with the new lower rate of capital gains tax.

Summary

Investors and venture capitalists who invest in qualifying unquoted trading companies are subject to a lower rate of capital gains tax (CGT) of 10% on a disposal of shares up to a lifetime limit of qualifying gains.

The Autumn Budget 2024 reduced the lifetime limit from £10m of qualifying gains to £1m, bringing it into line with the lifetime limit for business asset disposal relief (BADR). The rate of CGT on qualifying gains will increase from 10% to 14% for disposals on or after 6 April 2025, before increasing further to 18% for disposals on or after 6 April 2026 to align with the lower main rate of CGT.

This announcement was made alongside the Government displaying its commitment  for start-ups and scale-ups to access external sources of financial support by extending the enterprise investment scheme (EIS) and venture capital trust (VCT) schemes to 2035.  

Our comment

It is disappointing to see a demonstrated commitment to supporting start-up and scale-up businesses by extending the sunset clause on some venture capital schemes to 2035, whilst reducing the limit for a lower tax rate for serial business angels and investors who might not be able to access the venture capital schemes due to amounts invested. The increase in rates sees a reduction in the benefit for a higher rate taxpayer from a 10% CGT saving to 6% by 2026.

Where a company has undergone a recent reorganisation of its share capital before 30 October 2024, any election made on or after 30 October by a shareholder to realise the capital gain, rather than having it deferred automatically if certain conditions are met, will be subject to the new lifetime limit of £1m.