New Budget
It has been known for some time that this year’s Budget was going to see considerable increases in tax. As expected, Rachel Reeves’ Budget included a wide range of tax raising measures across all taxes. It is reported that these measures will raise an additional £40 billion in taxes, mostly from the increase in employer’s NICs.
Personal Tax
Rates of personal taxes and personal tax thresholds are to remain unchanged until 2027/2028. From 2028/2029, thresholds will increase in line with inflation. Scottish taxpayers will need to wait until 4 December to see if there are any changes to the Scottish rates of tax.
Until 2027/2028, more taxpayers will have to pay some income tax and, as wages increase, more workers will be pulled into the higher rate tax brackets.
In the lead up to the Budget, there had been speculation that pensions would be targeted. However, no changes were announced to the tax relief available on pension contributions or on pension withdrawals (including the tax-free lump sum).
It was announced that from April 2027 it will no longer be possible to transfer uncrystallised pension pots free of IHT on death. I expect that this will result in many choosing to take benefits from their pensions rather than leaving them untouched.
This will require some tax planning as there will likely be income tax to pay on pension withdrawals.
Capital Gains Tax
A number of changes to CGT rates were announced. The main rates of CGT changed on Budget Day and have now been realigned with the rates applicable to residential property – so, 18% for basic rate taxpayers and 24% for higher/additional rate taxpayers.
With a reduced CGT annual exemption of £3,000 from April this year, more taxpayers were facing the prospect of having to pay CGT for the first time, and now their CGT liabilities will be higher.
The rate of CGT applicable to gains on disposals of qualifying business assets is to increase from the current rate of 10%. From April 2025 the rate will increase to 14% and from April 2026 it will increase again to 18%.
Inheritance Tax
From a tax adviser’s perspective, the most interesting aspects of the Budget are the changes to IHT. The rates of IHT remain unchanged, and the threshold is set to remain at £325,000 until April 2030. However, the changes announced mean that a review of IHT planning previously undertaken will be required.
Changes to Agricultural Property Relief and Business Property Relief were widely expected. It was announced that with effect from April 2026, the 100% rate of relief will be limited to the first £1m of combined agricultural and business property. When the property transferred is more than £1m, relief will be restricted to 50%. The changes apply to property held in an estate and to lifetime transfers.
It was also announced that BPR is to be restricted to 50% for all qualifying holdings of unlisted shares (included AIM shares). So IHT will now be due at a rate of 20% on these investments.
Although the government believes that the impact of the changes to APR/BPR will be limited, it can be expected that there will be considerable scrutiny of the proposals and strong resistance, especially from the farming community.
The other significant IHT announcement was that uncrystallised pension benefits will form part of the IHT Estate from April 2027. I had thought that there would be changes to trust taxation, but perhaps that is one for the future? The overall impact of these changes is that more estates will have to pay IHT.
Other Matters
The other announcement in the Budget that caught my attention was the commitment to recruit additional HMRC staff and modernise infrastructure to improve the efficiency of HMRC. We can only hope that the investment results in improvements in the performance of HMRC.
Making Tax Digital (MTD) also received a mention with the proposal to reduce the turnover level for requiring taxpayers to be part of MTD to £20,000. This will not happen before April 2028. Many of these will be unrepresented taxpayers and so HMRC will need to have the systems in place to support them.
The abolishment of the remittance basis of taxation for non-domiciled individuals had been announced previously.
