On 30 October 2024 Chancellor Rachel Reeves delivered the hotly anticipated first Budget of the new Labour Government after 14 years of Conservative rule. The overall message was one of “invest, invest, invest”. A significant change in the Government’s fiscal accounting rules aims to unlock funds for investment to boost growth, with additional resources to be directed primarily toward infrastructure projects.
The Chancellor announced a wide range of tax measures aiming to raise a staggering £40bn of additional revenue. While tax rises were anticipated, and many of the changes were leaked in the lead-up to Budget Day the changes will have a significant impact on many businesses and individuals. This article looks at the main tax measures that have been announced that will impact businesses and individuals.
Business Tax Announcements
National Insurance Contributions (NICs) to rise for employers
From April 2025, employers’ NICs will increase from 13.8 per cent to 15 per cent. The threshold at which employer NICs become payable will fall from £9,100 to £5,000. To help mitigate these additional NICs costs for smaller employers, the employment allowance (which allows businesses whose annual NICs bill is less than £100,000 to reduce their NICs costs) will increase from £5,000 to £10,500 per year and will apply to all businesses as the £100,000 threshold will be removed. This increase to employer NICs is forecast to raise £25bn per annum.
Corporate tax roadmap published
The Government has published a Corporate Tax Roadmap which is “designed to give businesses the certainty they need and confidence that the UK intends to maintain its competitive position committed until the next general election”. In this document the Government commits to:
- Keep the headline rate of UK corporation tax at 25 per cent.
- Maintain the existing corporation tax small profits rate of 19 per cent.
- Maintain the existing core capital allowances regimes with full expensing and the £1m annual investment allowance, which can provide valuable tax deductions for certain types of capital expenditure.
- Keep the existing R&D, patent box and intangible assets tax regimes.
- Launch consultations to explore the tax treatment of predevelopment costs and to review the effectiveness of land remediation relief. It will also publish a technical consultation on draft legislation to modernise and simplify three elements of UK international tax legislation – transfer pricing, permanent establishment and the diverted profits tax – including the potential removal of UK-to-UK transfer pricing and further changes to transfer pricing legislation.
Business Rates
There will be two permanent lower rates of business rates for retail, hospitality and leisure properties and in the short-term there will be a 40 per cent relief for 2025/26 up to a cap of £110,000 per business. The Government has also launched a further paper, “Transforming Business Rates”, exploring more fundamental reform of the system.
Sales to Employee Ownership Trusts (EOTs)
Persons selling private trading companies to EOTs (which are a specific type of Employee Benefit Trust which acquires the company for the benefit of its employees) can benefit from a capital gains tax exemption if various conditions are satisfied. Various changes are proposed to the regime, including that the former owners cannot retain control of the company post-sale to an EOT, that the trustees of an EOT must be UK resident and that the EOT conditions must continue for a longer period in order for the tax reliefs not to be lost.
Personal tax measures
Capital gains tax (CGT) changes
A number of changes have been announced as follows:
- with effect from 30 October the rates of CGT have increased from the current rates of 10 per cent (basic rate taxpayers) and 20 per cent (higher and additional rate taxpayers) to 18 per cent and 24 per cent respectively. There are special provisions for contracts entered into before 30 October 2024 but completed after that date. Anti-forestalling rules have also been introduced with immediate effect which can in certain circumstances apply to unconditional contracts entered into before 30 October 2024 which were not completed by then. The rates for selling second properties remain at 18 per cent and 24 per cent respectively.
- The CGT rate for Business Asset Disposal Relief (BADR) (previously called Entrepreneurs Relief), which can apply to lifetime gains of £1m on certain disposals by employees and directors in their unlisted businesses, will continue. However, the tax rate will increase from the current 10 per cent to 14 per cent for disposals made on or after 6 April 2025 and from 14 per cent to 18 per cent for disposals made on or after 6 April 2026. This will mean an increased bill of up to £80,000 for those planning to sell their businesses after April 2026.
- The CGT rate for Investors’ Relief, which applies in similar circumstances to BADR but where the investor is unconnected with the business, will increase in parallel with the BADR rates. Furthermore, the lifetime limit for this relief will also reduce from £10m to £1m for disposals made on or after 30 October 2024, significantly limiting its financial benefit going forward.
Carried interest changes
- Carried interest gains made by investment managers will from 6 April 2025 be subject to CGT at a new flat rate of 32 per cent (rather than at 18 per cent or 28 per cent under the previous system). This is a temporary measure however, as the Government intends to consult further on a revised tax regime for carried interest from April 2026. The proposal is that qualifying carried interest will then be treated as trading profits and subject to Income Tax and NICs. However, the amount of “qualifying” carried interest subject to tax will be adjusted by applying a multiplier resulting in an effective tax rate at 34.1 per cent including NICs.
Inheritance Tax (IHT) changes
A variety of changes will be made to IHT as follows:
- Most significantly agricultural property relief and business property relief will change from 6 April 2026. The existing 100 per cent rates of relief will continue only for the first £1m of combined agricultural and business property. The rate of relief will be 50 per cent thereafter, meaning an effective 20 per cent IHT charge. This represents a major shift for many family businesses, estates and trusts which will now have to plan for IHT liabilities on business and agricultural property. Agricultural property relief will however be extended from 6 April 2025 to land managed under an environmental agreement with the government or public body.
- An effective IHT rate of 20 per cent will also extend to shares in companies on the Alternative Investment Market which were previously exempt from IHT if held for at least two years. AIM shares will not come within the new £1m business property relief allowance.
- Pension funds and death benefits payable from a pension into a person’s estate will be brought into a person’s estate for IHT purposes from 6 April 2027. A formal consultation on these changes will be conducted.
- The IHT nil-rate bands are already frozen at current levels until 5 April 2028, and this will be extended for a further two years until 5 April 2030.
Non-Domiciled individuals: a new regime
The Government has confirmed that it will proceed with abolishing the non-domicile tax regime with effect from 6 April 2025 and it will replace it with a residence-based regime. In very brief summary:
- Individuals who have not been resident in the UK for the previous 10 years will not pay UK tax on foreign income and gains (FIG) for the first four years of tax residence even if such FIG is remitted to the UK.
- There will be a temporary repatriation facility applying for three years to encourage individuals who previously claimed the remittance basis to remit existing pre-6 April 2025 foreign income and gains to the UK at reduced tax rates of 12 per cent rising to 15 per cent from 6 April 2027.
- For CGT purposes qualifying individuals will be able to rebase personally held foreign assets to 5 April 2017 on a disposal where certain conditions are met.
- A new residence-based system for inheritance tax will apply from April 2025. Inheritance tax will be due on a person’s worldwide assets on their death if they have been UK tax resident for 10 UK tax years out of the prior 20 tax years and there will be a “tail-provision” which will keep such persons within the scope of UK IHT on worldwide assets for a period after leaving the UK.
- The Overseas Workday Relief which can exempt from UK tax employment income from non-UK duties will be reformed and extended to four years although the amount claimed annually will be limited.
Income tax
As promised in the Labour Manifesto, income tax rates will not increase, and income tax rate thresholds will be “unfrozen” and will begin to rise in line with inflation from April 2028.
Stamp duty land tax: additional rate increase
The 3 per cent additional rates of SDLT which, very broadly, apply to certain property purchases in England and Northern Ireland where a buyer is an individual and already owns another residential property and to corporate buyers, are being increased by 2 per cent such that the additional rate will now be 5 per cent. This means that a top rate of 17 per cent SDLT (or 19 per cent for non-resident purchasers) applies to that part of the purchase price exceeding £1.5m. The higher rate of SDLT which, very broadly, can apply to purchases of residential properties worth more than £500,000 by companies for non-commercial purposes, is to be similarly increased from a flat rate of 15 per cent to a flat rate of 17 per cent.
In both cases, the new rates of SDLT will apply to all purchases where contracts were exchanged after midnight on 30 October 2024. However, transactions which exchanged contracts before midnight on 30 October 2024 and which complete before 1 April 2025 will continue to benefit from the old rates of SDLT if certain conditions are satisfied.
VAT on independent school fees
As anticipated, the Government has confirmed that education and board and lodging supplied by independent schools from 1 January 2025 will be subject to VAT at the standard rate of 20 per cent. Fees received by independent schools from 29 July 2024 for terms commencing from 1 January 2025 are also subject to VAT due to anti-forestalling provisions.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, October 2024
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