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Chancellor Rachel Reeves has delivered her budget. The headlines for our clients are clear.
Pension will fall into your estate for Inheritance Tax (IHT) calculations from April 2027.
Inheritance Tax thresholds frozen at £325,000 for each person until 2030. The Residence Nil Rate band relief on estates under £2m remains.
Capital Gains Tax (CGT) rates have risen from 10% to 18% for basic rate taxpayers and rise from 20% to 24% for higher rate payers (no change to residential property CGT rates) from 30th October 2024.
Carried Interest for private equity will increase its CGT rate from 28% to 32% from 6th April 2025, eventually becoming treated as income, but at a different tax rate.
Business Relief (BR) for IHT exemptions will be reduced. The first £1m will attract full relief, any additional BR schemes will receive a 50% reduction in IHT.
Agricultural Property Relief (APR) will also receive the same changes, with the first £1m will attract full relief, any additional APR schemes will receive a 50% reduction in IHT.
BR and APR will share the £1m exemption if both apply to you.
The junior share market (Alternative Investment Market - AIM shares) will attract a 50% relief on IHT.
No additional freeze on Income Tax thresholds.
VAT will be levied on private school fees from 1st January 2025.
Abolition of the non-dom regime.
Increase in employers National Insurance (NI).
An overall summary of the budget is set out in the link below via a pdf we have created for you, please do click through and read more.
Whilst the budget could have been worse for our clients, it was not a kind one and whilst some of the feared changes did not materialise, like a reduction in tax free cash on pensions, the budget has created some key planning questions, especially with regards to IHT.
The Labour manifesto promised to leave the three main revenue-raising taxes alone, Income Tax, VAT and employee National Insurance. Looking at the headlines, one might think the Autumn Statement delivered on this pledge. Income tax thresholds would be unfrozen, and from 2028-29, these thresholds will once again rise in line with inflation, giving workers more headroom for salary growth before they hit the next income tax band. Until then, the income tax personal allowance (PA) will remain frozen at £12,570 and the higher rate threshold (HRT) at £50,270. Additional rate tax (at 45 per cent) will start at £125,140.
If you look deeper though, the average “working people” that Reeves refers to, are in fact going to lose out. The key measure was a 1.2% increase in employer’s National Insurance to 15 per cent. The threshold at which employers start paying the tax was also reduced from £9,100 to £5,000.
Rishi Sunak immediately accused Labour of “broken promise after broken promise” and a reciprocal accusation of having fiddled the figures. His view was that employer National Insurance (NI) increases would be passed onto employees via low wage growth and the removal of bonuses. Pensions falling into your estate for Inheritance Tax is another catch all.
Away from political wrangling, immediate effects were seen as the Office of Budget Responsibility (OBR), the fiscal watchdog, confirmed mortgage rates would likely increase as interest rates would need to be 0.25% higher and inflation would rise by 0.4%.
The NI changes will come into effect from April next year and are expected to raise £25bn a year by the end of the OBR’s forecast period. The OBR also stated that it thinks 76% of the employer NI increase will be passed onto employees over time. The Office for National Statistics (ONS) reported the median wage in the UK is now £37,430, meaning the NI rise would cost their employers an average of £965 per year.
The OBR downgraded its growth forecasts for later in the Parliament. The body said that increased public spending would “crowd out” private investment while tax rises on businesses would hit profits and wages. The chancellor told the Commons that the additional investment in her budget would lead to a 1.4% increase to GDP. However, the OBR said it would take 50 years for this growth to be realised.
Reeves also made substantial changes to Inheritance Tax. From April 2026, full relief from IHT on agricultural property and business property will be capped at £1mn. Assets beyond that level will receive 50 per cent relief, resulting in an effective tax rate of 20 per cent. Reeves also said she would extend the freeze in the IHT tax-free allowance of £325,000 from 2028 to 2030, even though she opted not to do so on income tax thresholds.
What is clear is the need for planning at this point. Pensions will no longer be a family asset, from 6th April 2027 attracting IHT at 40% unless passed to your spouse, then if you are over 75 at the date of death, benefits are also taxed at your beneficiary’s relevant income tax rate when they access the capital. It is clear that Labour want pensions to be used in retirement as a source of income and are suddenly no longer an obvious solution to long term estate planning. Over 75’s with an IHT problem will now consider accessing their pensions and use other assets to try and mitigate their IHT bill.
The budget was another example of how hard it is to create a long-term plan and leave it unadjusted. Investment markets have moved away from long term cycles to shorter term gyrations with increased volatility, and now these regular fiscal events unbalance clients plans throughout their working life and into retirement. We are here to help and it is clear that we have much to discuss with our clients in the coming months. The chancellor has left us with lots of options to incorporate into your financial planning and we are looking forward to reviewing them with you. Do have a good weekend.
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