The headline for Chancellor Rachel Reeves’ first Budget on 30 October 2024 (“the Budget“) was “Fixing the Foundations to deliver Change” and, as expected, there were significant changes announced that affect private clients and their personal taxation. This article provides an in-depth look at the changes to inheritance tax (“IHT“) and capital gains tax (“CGT“) in particular, along with some initial planning points to consider.
The Budget also included confirmation of the wide-ranging reforms to the tax regime for non-UK domiciled individuals (“non-doms“) to take effect from 6 April 2025. Please see the Wedlake Bell website for detailed analysis from our specialist Private Client Offshore team.
CGT rates
The Budget included increases to the main rates of CGT. These were not unexpected and were ultimately lower than had been predicted. For disposals made on or after 30 October 2024:
- the lower rate of CGT was increased from 10% to 18% (this rate currently applies to capital gains realised by individuals who have income levels of less than £50,270 in the tax year);
- the higher rate of CGT was increased from 20% to 24% (this rate applies to any excess capital gains realised by individuals not falling within the above lower rate band); and
- the CGT rate for trustees was increased from 20% to 24%.
The new rates of CGT now match the rates of CGT for disposals of residential property (also 18% and 24%), which at least brings a degree of simplicity to the CGT system. The CGT annual exemption (currently £3,000 for individuals and £1,500 for trustees) remains unchanged.
With CGT increases widely forecast, many individuals will have disposed of assets (by way of sale or gift) before Budget day to trigger CGT at pre-Budget rates. This planning is generally not undermined by these Budget reforms; however, an anti-forestalling measure was announced which means that any unconditional but uncompleted contracts entered into before 30 October 2024 to “bank” pre-Budget CGT rates will not work as intended and will be subject to CGT at the new rates.
CGT reliefs for business assets
The Budget also included changes to CGT business asset disposal relief (“BADR“).
BADR is available to entrepreneurs and those with business assets and provides CGT relief through a lower rate being charged on capital gains realised on the sale of shares or an interest in a trading business, subject to certain conditions.
Before the Budget, affected individuals had a cumulative lifetime limit of £1 million that applied to capital gains eligible for BADR, with such gains being taxed at the lower rate of 10%. Gains in excess of the £1 million limit are taxable to CGT at standard rates.
The Budget included the announcement that:
- the £1 million BADR lifetime limit remains unchanged; but
- the rate of CGT on gains within the BADR limit will be raised from 10% to 14% for disposals made on or after 6 April 2025; and
- the rate of CGT on gains within the BADR limit will be raised from 14% to 18% for disposals made on or after 6 April 2026.
| CGT planning point Individuals with qualifying business assets who are planning to sell or gift those assets in the near future may want to consider whether to accelerate such disposals to take place before 6 April 2025 to benefit from the current 10% BADR rate. Anti-forestalling measures announced in the Budget mean that any contract for sale must be completed before this date in order to trigger the current 10% rate; entering into an uncompleted contract will be insufficient. |
IHT thresholds
It had been anticipated that IHT would be one of the personal taxes targeted by the government. Increases to the headline rate (40%) had been feared, as well as the introduction of an IHT “gift tax” to apply at the date of certain lifetime gifts. In the end, these predictions did not materialise, but IHT was instead affected by reductions to IHT relief for business and agricultural assets (see below) and by freezing IHT thresholds. This latter point is regarded as a tax rise by stealth as it pushes more people into the chargeable IHT band over time. The Budget included the announcement that:
- the IHT nil-rate band will be frozen at £325,000 until 5 April 2030; and
- the residence nil-rate band will be frozen at £175,000 until 5 April 2030.
| IHT planning point These IHT threshold freezes place increased importance on carrying out IHT planning during your lifetime to minimise the value of your estate chargeable to IHT at death. Subject to the reforms referenced below, there are existing IHT reliefs and exemptions that can be taken advantage of during lifetime and through IHT planning clauses in your Will; in particular, for lifetime planning, there is a valuable relief for those with surplus income, allowing individuals to gift income out of their estate without a potential IHT charge at death. |
IHT reliefs for business and agricultural assets
One of the most controversial announcements in the Budget were the reforms announced to IHT agricultural property relief (“APR“) and business property relief (“BPR“), to take effect from 6 April 2026.
BPR applies to qualifying assets such as partnership interests and shares in unquoted companies provided the underlying business is trading and not mainly carrying on investment activities. APR applies to qualifying land and property used for agricultural purposes.
At present, qualifying agricultural and business assets receive up to 100% relief from IHT with no cap on the amount of relief. This can enable family businesses and agricultural estates to pass down to younger generations on death without an IHT charge. Shares listed on the Alternative Investment Market (“AIM“) currently attract 100% relief.
The Budget included the following announcements. These are subject to consultation and draft legislation meaning that further details may come at a later stage, but at present, the proposed headline measures are as follows.
- £1 million cap – from 6 April 2026, there will be a cap of £1 million on the combined value of qualifying agricultural and business assets that can benefit from IHT relief at 100%.
- 50% relief after £1 million – there will be IHT relief at 50% for qualifying agricultural and business assets where the value exceeds this £1 million cap (meaning an effective rate of IHT of 20% on such assets in many cases).
- AIM shares – the value of shares not listed on a recognised stock exchange (such as AIM) will qualify under the BPR rules for relief at 50%, not the current 100% (meaning an effective rate of IHT of 20% on such shares in many cases).
- Trusts set up before 30 October 2024 – where the trust holds qualifying agricultural or business assets, the trustees will be able to claim 100% IHT relief for a total of up to £1 million of qualifying business and agricultural assets in the trust, meaning the trust effectively receives its own £1 million allowance; however, IHT will be chargeable thereafter subject to relief at 50%.
- Trusts set up on or after 30 October 2024 – where the trust holds qualifying agricultural or business assets, the £1 million allowance will be shared between all trusts set up on or after 30 October 2024 by the same settlor, rather than each trust having its own £1 million allowance. As above, IHT will apply to the value of qualifying assets in excess of the trust’s allowance, with IHT relief available at 50%.
There is concern already as to how this will impact agricultural estates and family businesses. Whilst we need sight of the consultation and draft legislation to fully analyse the impact, some initial planning thoughts are as follows, dependent on the individual’s circumstances.
| BPR and APR planning points • Fragmentation – for those with agricultural or business assets far in excess of the £1 million cap, there may be merit in considering a fragmentation of those assets amongst family members to take advantage of each individual’s £1 million allowance, noting however that anti-forestalling measures have been announced that mean the donor would need to survive seven years from the date of the gift for the planning to be fully effective. Whilst a gift of such assets will also trigger a CGT disposal, there are reliefs available to potentially defer (or “holdover”) the gain for CGT purposes. • Trusts – fragmentation of business or agricultural estates could be achieved by setting up trusts for family members before 6 April 2026 to “bank” the current 100% IHT relief (and taking advantage of the above CGT “holdover” relief), noting however the anti-forestalling rules mentioned above. • AIM shares – individuals and trustees with share portfolios using the AIM market may need to discuss with their investment managers whether to retain those investments after 6 April 2026 given that such investments may at that point have an effective IHT rate of 20% on their value should an IHT event occur. • Wills – those with Wills that include an “IHT nil-rate band trust” to hold their qualifying agricultural or business property may need to review whether their Will or accompanying letter of wishes needs updating in light of these changes. • Life insurance – policies to cover the anticipated IHT liability could be considered. • Liquid assets in trusts – if trustees do not hold liquid assets to pay any IHT charges on agricultural or business assets, they will need to consider in advance how the IHT will be funded if charges arise after 6 April 2026. • Instalment option – the ability to pay IHT over ten equal annual instalments (where this option is available) will assist to some degree. |
IHT and pension funds
The announcement that pension funds and death benefits will be brought within the scope of IHT, whilst not unexpected following pre-Budget rumours, is significant and potentially far-reaching.
Currently, unused pension funds are exempt from IHT when the pension-holder dies, as are death benefits from pension schemes. From April 2027, it is proposed that:
- unused funds within a registered pension scheme (including a SIPP) and pension death benefits will form part of the pension holder’s estate for IHT purposes; and
- the chargeable amount will be subject to IHT at 40% (subject to available exemptions and reliefs).
It is proposed that the pension scheme administrators will be responsible for reporting and paying the IHT from the pension fund.
These announcements are subject to consultation and legislation, and this is needed before action points can be fully considered. If the proposals are implemented broadly in line with the proposals, this is likely to change the way pension pots are used as an estate planning tool to help minimise IHT on death. From April 2027, as currently proposed, there may be no IHT advantage to retaining wealth within a pension fund to pass on to beneficiaries on death.
You can read our Autumn Budget analysis across the main areas affecting UK private clients in the following articles.
- Autumn Budget 2024: school fees and education trusts
- Autumn Budget 2024: property taxes
- Ask the Expert: How will the proposed inheritance tax reforms affect farmers?
If any of the Budget announcements have raised concerns for you and your family’s tax and succession planning, please contact your usual Wedlake Bell adviser to discuss how you may be affected and the planning options available to you.
This publication is for general information only and does not seek to give legal advice or to be an exhaustive statement of the law. Specific advice should always be sought for individual cases.
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